The IRS has recently released 401(K) contributions for 2023, and there is good news for farmers! As expected, contribution amounts are increasing across the board, improving our heartlands’ workers’ ability to fund their retirement and maintain their hard-earned lifestyle throughout their twilight years. Let’s take a look at the hard numbers.
The Solo 401(K) Plan
Many farms operate under a Schedule F 1040 sole proprietorship with special tax deductions and credits. If that’s the case, the farmer can put into the Solo 401(K). A Solo 401(K) has more significant contribution amounts than other retirement plans, but starting in 2023, it will allow even more outstanding contributions.
In the table above, contribution limits are up by $4,000. Catch-up contributions for those over 50 are increased by $1,000. Aside from high contribution limits, the Solo 401(K) has other unique benefits, such as covering a spouse if they work on the farm. You can contribute pre- or post-tax dollars.
If you choose pre-tax dollars, you can deduct those funds from your annual tax obligations, but you must pay taxes on any withdrawals. If you select post-tax dollars, this is a Roth variant. The funds grow tax-free to and through retirement. Any withdrawals you take are also tax-free as long as you abide by the guidelines set forth by the IRA.
Unfortunately, only a sole proprietorship without payroll workers (excluding a spouse) can utilize a Solo 401(K).
The Traditional 401(K) Plan
For farmers who employ farmhands, you may want to look into a traditional 401(K) plan, which allows you to match employee contributions. Looking out for your workers’ futures is an excellent way to attract and retain loyal, hardworking farmhands. And in 2023, this will be even easier to do with higher 401(K) contributions.
Here we’re seeing nearly a 10% increase in contribution amounts, nearly double the previous year’s rise. If you are over 50 years old, you can put an additional $3,000 into your 401(K).
If you match 4% of your employee’s contributions to their 401(K) plan, they will be getting a huge benefit that is difficult to pass up or let go of since it is essentially ‘free’ money for them. You can also opt for a Roth variant in your 401(K) retirement plan.
SIMPLE Retirement Plan
Next up to bat is the SIMPLE (Savings Incentive Match Plan for Employees) plan that requires a 3% employer match or a 2% non-elective match (2% of the employee’s annual salary). It is available only to small businesses that employ fewer than 100 workers. Its cost-effectiveness with low set-up fees and yearly maintenance costs is where it shines.
Farmers or farmhands under 50 can save an extra $1,500, while older workers can put in $3,500 instead of only $3,000 under a SIMPLE retirement plan.
What retirement plan is best for you, your family, and your farmhands? Reach out today for a consultation.