IRA saves income tax for farmers?
By Peter Callan, Virginia Tech University | |
Penton Business Media |
With prices expected to approach record levels for major crops and some livestock, farmers are anticipating high income tax liabilities when they file their 2011 tax returns.
Farmers have routinely prepaid operating expenses (seed, fertilizer, chemical, feed etc.) and purchased new equipment as a means of reducing their tax liabilities. Historically, farmers have re-invested in their businesses with little thought of diversifying their investments into non-farm assets.
An Individual Retirement Account (IRA) is a savings plan that provides the taxpayer (farmer) with tax advantages for setting aside money for retirement and diversifies investments.
There are two types of IRAs for retirement saving.
Traditional IRAs are funded with before-tax contributions and the Roth IRAs are funded with after-tax contributions. A taxpayer can open and make a contribution to a traditional IRA and/or a Roth IRA if the taxpayer (or if filing a joint return, their spouse), receives taxable compensation (e.g. earned income — wages, salaries, commissions, self-employment income — net earnings from schedule F or C) during the year.
The
A taxpayer whose age is more than age 70.5 years by
Regardless of the age of the taxpayer, contributions can be made to a Roth IRA.
Contributions to traditional and Roth IRAs can be made at any time during the year and up to the due date for filing a tax return for that year, not including extensions. For tax year 2011, contributions must be made by
The amount contributed to an IRA is based on the amount of taxable income received by the taxpayer during the year. In 2011, the maximum contribution for a traditional IRA and Roth IRA is the lesser of
For example, a farmer with
The maximum contribution to a spousal traditional or Roth IRA (for a spouse with little or no earned income in 2011) is the lesser of
A taxpayer may contribute 100 percent of earned income to either a traditional IRA, a Roth IRA, or split between both types of IRAs up to the annual contribution limit.
Benefit of traditional IRA
The benefit of a traditional IRA is that the contributions are tax-deductible in the year the taxpayer makes the contribution.
For example, the taxable income for a couple is
Assuming the couple is in the marginal 25 percent tax bracket (Federal) and their IRA contributions are
The tax deductible contributions and earnings are taxable as ordinary income when they are withdrawn from the account after age 59.5. The
Like traditional IRAs, Roth IRAs offer tax-deferred earnings. Earnings grow tax-free. There is no tax upon withdrawal, so long as the taxpayer held the account for at least five years and is over the age of 59.5.
Contributions to a Roth IRA are never tax deductible. The taxpayer must have earned income equal to or greater than their contribution. In order to contribute to a Roth IRA, their Adjusted Gross Income (AGI) must be below certain income levels, e.g.
Withdrawals of earnings in a Roth IRA prior to age 59.5 are generally subject to ordinary income taxes and an additional 10 percent penalty.
IRA contributions can be used to purchase a variety of investments (stocks, bonds, certificates of deposits etc.) which are sold by banks, insurance companies, brokers and mutual funds.
Tax advisors, loan officers and friends are excellent sources of references to find an investment advisor who will help the farmers meet their goals and risk tolerance. Frequently, investment advisors will discuss the topic of compound interest (return) with their clients in making a plan to invest IRA contributions.
Compound interest occurs when interest is earned on a principal sum along with any accumulated interest on that sum. In other words, you earn interest on interest.
Time magnifies the effects of compounding. Thus, you will make more money the longer your investment is able to work for you. Table 1 illustrates the impact of compound interest rates on the future value of a
Table 1. Future Value of a |
|||||
|
Interest Rates |
||||
Years |
2% |
4% |
6% |
8% |
10% |
5 |
|
|
|
|
|
10 |
|
|
|
|
|
20 |
|
|
|
|
|
30 |
|
|
|
|
|
40 |
|
|
|
|
|
IRA accounts provide farmers the opportunity to diversify and invest in income- producing assets (e.g. certificates of deposit, mutual funds etc.), and not depend entirely on their farm assets for retirement income.
Farmers who make IRA contributions early in their careers are afforded the opportunity to reap major increases in the value of their contributions through the impact of compound interest.
Income tax savings may occur in either the current tax year or when withdrawn during the retirement years.
For more information on IRA’s, see
Copyright: | © 2011 Penton Media |
Wordcount: | 1038 |
Tougher Reverse Mortgage Qualifications For Seniors are Implemented – reversemortgagelendersdirect.com Offers No Income No Credit HECM Reverse Loans
Advisor News
Annuity News
Health/Employee Benefits News
Life Insurance News