How IRAs Can Help Farmers Nurture Their Nest Egg

As the adage goes, “a dollar saved is a dollar earned.” Perhaps even more so if the dollar is saved from paying taxes and can go toward funding retirement. Many farmers may imagine a scenario where they keep working until their dying breaths. While that may be possible, it is prudent to have other income and a backup plan if needed. Additionally, there can be tax advantages to contributing to a retirement plan now, regardless if the income is needed in the future.

Many farmers fall under the sole proprietor/self-employed category. That will be the predominant situation we look at. It could be that the farmers, their spouses or both are also working off the farm and contribute to their employer’s retirement plan. That can certainly be beneficial, especially if the employer matches contributions, but in some cases may alter the tax impacts of a self-employed retirement plan. Each farm’s situation will be a bit different, so be aware this is not financial or tax advice but general education.

TRADITIONAL IRA

A traditional IRA allows taxpayers, such as self-employed individuals, to contribute up to an annual set amount. The limits are published each year by the federal government. For the 2025 tax year the annual limit is $7,000 ($8,000 for age 50+), and in 2026 it increases to $7,500 ($8,600 for age 50+). Not only is the amount invested and allowed to grow tax free until withdrawal from the account (when the withdrawal is taxed as income), but it can also provide a current-year tax deduction when the contribution is made.

Another significant feature of these accounts is that contributions can be made up until the tax filing deadline of the next year. For example, relatively soon taxpayers will begin filing their 2025 tax returns in early 2026. The tax filing deadline is April 15, so a contribution can be made up until April 15 and count as a contribution for 2025 tax year.

Keep in mind that the annual limit for 2025 is still the $7,000 whether through a one-time contribution or perhaps earlier contributions made in 2025. Practically speaking, this means a “pro-forma” or hypothetical tax return could be calculated by the owner or tax preparer to determine the current tax estimate and then see how various IRA contribution amounts affect taxes owed. A tax return could even be filed early (some farms take advantage of the agriculture March 1 filing deadline), and still a contribution can be made by April 15. Ideally if that were the case the farm would know how much contribution they plan to make in order to report it on their tax forms correctly. Most likely the farm knows how much they are going to contribute but just have not notified or transferred the money to the plan administrators yet.

The IRA plan administrators will request which year you would like to make the contribution for. Traditional IRA contributions are deducted on line 20 of the Schedule 1 (Form 1040) and can reduce adjusted gross income (AGI) (line 11a Form 1040) on the tax return. Both spouses can contribute to their own traditional IRA for a potential deduction of up to $14,000.

Again, the deduction amount can be impacted by whether either spouse is covered by a work retirement plan and the couple’s overall income, but it can provide a significant deduction if allowed to take the full amount. If the taxpayer or preparer is using a tax software to run scenarios, it can make comparisons pretty easy. If software is not available, an IRA Deduction Worksheet is included with the Form 1040 instructions that can be a manual way to calculate the traditional IRA deduction.

ROTH IRA

Many questions come up about Roth IRA accounts. They are also a helpful planning tool but are a bit reversed from traditional accounts. Roth accounts do not provide a current-year tax deduction, but when the amounts invested are withdrawn at a later time, they are not subject to income tax.

It is important to note that the annual contribution limits are considered combined for both the traditional and Roth IRAs. For instance, a $3,500 contribution could be made to a Roth and a $3,500 contribution made to a traditional but still not exceeding the $7,000 limit per individual.

Other plans exist, such as SEP, SIMPLE, and 401(k) retirement plans, that are similar in nature, with some differing features and stipulations. This article does not go into detail on each of those but hopefully provides a bit of support on using IRAs for both retirement and tax planning purposes.