By Jason Fewell
Originally published by Dakota Farmer at farmprogress.com
Oftentimes, farmers and ranchers don’t plan to retire. Many farmers work well past the typical retirement age. The average age of farmers in the United States is about 60 years old with 68% of farmers over the age of 54. In light of this, retirement planning is something that many farmers and ranchers often put off. Many farmers and ranchers view their land as their retirement and consider that to be enough. Afterall, it provided a living in the past, why wouldn’t it continue to do so?
But farmers and ranchers should consider planning for retirement. In some cases, health may dictate whether someone retires regardless of their mental state or willingness to work. Making long-term plans for living after a productive farming career should not be something that gets left for a later time. Oftentimes, the farming economy is poor when the broader economy is doing well. Diversifying investments lowers risk of loss or poor returns on one asset when another asset may have good earnings.
We all know that social security will not be enough to retire on. It is also important to know that social security in retirement is directly tied to how much social security tax is paid while you are earing income. Living expenses continue to increase so financial needs in retirement continue to increase.
There are several tools available for farmers to use for retirement. Some of these require that employees also receive retirement plan contributions. It’s important to talk to your tax preparer when setting up and making contributions to a retirement account. Retirement plans can be invested in several different vehicles tied to equity markets, bond markets, simple interest-bearing accounts, or whatever is comfortable for the investor.
Individual Retirement Accounts (IRA) are very common. Two types of these exist—traditional and Roth IRAs. Contributions to a traditional IRA are not taxed at the time of contribution but are taxed when funds are withdrawn. A Roth IRA’s earnings are tax free because contributions to the fund are taxed as they are earned. Up to $7,500 ($8,600 for those 50 or older) can be contributed to a traditional or Roth IRA. Contributions cannot exceed total taxable income for the year.
A Simplified Employee Pension plan (SEP) allows for larger contributions—up to 25% of each employee’s pay and all employees, including the farmer, receive the same percentage contribution. The 2026 limit for a SEP contribution is $72,000. Cost-of-living adjustments increase the dollar amount that can be contributed each year. There are other limitations to how much can be contributed so it’s important to work with your tax preparer to determine how much of your income you can contribute to a SEP IRA.
Savings Incentive Match Plan for Employees (SIMPLE) IRAs allow employers to match a percentage of employee contributions to retirement plans. These can offer some flexibility and allow employees to understand they need to fund their retirement plans too.
Defined benefit plans can greatly reduce taxable income in the year they are funded. When the funds are withdrawn, income taxes will be owed on those dollars. There are usually some costs associated with setting up and maintaining these plans, so it is important to ask questions and talk with investment advisors and tax preparers when getting into these plans.
Finally, just setting aside money in the bank or investing in equities is an easy way to save some dollars for retirement regardless of the tax implications. Just be sure that these are retirement dollars and not intended for current living expenses.
Cash flow is often short, and it can be difficult to find dollars to contribute to a retirement plan. However, making a sacrifice today to invest in your retirement is a long-term strategy that will pay off in the future. Saving money for retirement early and often pays huge dividends. Most retirement plans have some type of tax benefit. But contributing to your retirement funds should not be a way to avoid income taxes—rather, deferring taxes is a benefit to contributing to a retirement account. Planning for retirement is important so you can live comfortably—not because you want to avoid income taxes today.
The North Dakota Farm Management Education Program provides lifelong learning opportunities in economic and financial management for persons involved in the farming and ranching business. Visit ndfarmmanagement.com, Facebook @NDFarmManagementEducation, or contact Madison Bodine, State Supervisor for Farm Management Education, at mbodine@nd.gov or 701-328-4567 for more information. The ND Farm Management Education Program is sponsored by the North Dakota Department of Agriculture.