Should You Consider a Cash Balance Plan

Retiring farmers may want to consider a cash balance plan to defer final income taxes at retirement

Photo by Sebastian Gómez on Unsplash

Farmers who are approaching retirement face a very large tax liability. The year of their final harvest will include all of the costs of growing the crop (less the prepaids from the previous year) but likely most of the income from selling the crop will be realized in the next year with little or no expense to offset this income.

Even for mid-side operations this can result in easily showing $2 or more millions of net income leading to a tax liability approaching a million or more.

Assuming that the farmer has at least five years of time left before retirement allows them to set up a cash balance pension plan and pair it with a 401(k) plan. Assuming the farmer is in their late 50s or early 60s allows them to easily set aside about $400,000 per year if needed. Over a 5-year period allows the farmer to defer about $2 millions of income and then the farmer is not required to start reporting this income until they reach age 75 (assuming they were born in 1960 or later).

Here is a table showing the amounts that a farmer can contribute based on their age: