We have read your past columns on setting up a pension plan. What type of a plan is this? We have been using SEP for a long time now, but this sounds like you could put aside more money than what a SEP can do for you. However, does that mean we should, if we have other uses for the money right now? What are good reasons for setting aside this money?
We have a child farming right now and we’d like him to take over and perhaps we should use our money for helping him.
– Help Out Next Generation.
Dear Help Out Next Generation:
It’s your money and you know how best to use it. If you need to help your son out financially once in a while, then that’s what you should do.
These plans are more designed for people who are trying to help the next generation by turning over more and more of their farm operation to their farming child(ren). There’s always that time when it becomes more important for the next generation to step up, start buying their own equipment, and start their own farming career in the way they’d like to do it.
Parents traditionally help here by letting their farming child use their used equipment on trade-in and giving them more land to farm and basically letting their child’s operation grow as your own active operation transitions into being a landowner only.
This is typically a time where most farm couples pay more in income taxes in one year than they have their entire lifetime. They are still actively farming, but now the son is getting the tax deductions for more machinery and is handling a larger part of the expenses.
That’s good because with this sudden overflow of income – as you continue to farm and yet don’t have the expenses – this is the time you can start looking forward to the future and start putting money aside. You can do that one of two ways – either before tax or after tax.
If you choose the before tax option and you want funding options that exceed your traditional SEP’s, IRA’s, etc. – all defined contribution plans – you might take a look at the defined benefit plan.
Not only can you put away as much as sixty percent of this income into the plan, but you can use these plan funds for many, many reasons.
First of all, of course, is to supplement your income as you retire. Some people will continue to farm actively their entire life by receiving crop shares. Others will eventually become landlords.
Either way, you might not need the income from the pension plan unless your farming son has a few bad years and can’t pay the rent. Or you decide the best way to help your farming son is to take less rent or crop shares and increase his bottom line from farming while you make up the difference with your pension.
As long as you have ‘active’ earnings, you can continue to put into the pension plan even beyond seventy – a time when most other plans say you have to take money out. In a defined benefit plan, you don’t have to take withdrawals as long as you are making contributions – even past age seventy.
You may decide this is how you want to build funds for your non-farming children so when the day of reckoning comes, your non-farming children will receive a mix of taxable and non-taxable benefits from your pension plan. Most of these plans have a self-completing life insurance element to them (also almost entirely tax deductible) which can provide funds tax-free to the non-farming children.
There’s a lot of ways you can help your farming son, but one of the best ways is to get out of the way earlier, let him take on more of the farming operation, set aside some money so you’re not a burden, and provide assets to your non-farming children so he won’t have to when you die.