It’s the end of the year. The farm made money. You’re staring at your P&L and you say to yourself, We’re gonna owe so much in taxes. We need a tax deduction. What’s the standard play? Buy a tractor. Or a truck. Or anything with a price tag big enough to shrink the tax bill. Or maybe its best to reward our hard-working team with year-end bonuses? Either option could be the right one.

But a more strategic move is investing in a small business retirement plan. Contributions to plans like SEP-IRAs, SIMPLE IRAs, or 401(k)s offer substantial tax advantages while supporting financial stability for both farm owners and their employees. It’s an investment in your future and those that make your success possible.

Key Tax Benefits of Retirement Plans

Retirement plans offer a range of tax benefits that go far beyond what a new piece of machinery can do:

1. Immediate Tax Deductions

Contributions you make to your employees in a business retirement plan are deductible business expenses, lowering your adjusted gross income and your overall taxable income. Less income on paper equals less paid in taxes.

2. Unlock Other Tax Credits

Reducing AGI doesn’t just cut your taxable income—it could unlock valuable tax credits:

The Earned Income Tax Credit (EITC)
The Saver’s Credit, which rewards retirement contributions
The Child Tax Credit for families raising children on the farm

3. Deferring Taxes on Growth

Funds contributed to retirement accounts grow tax-deferred, meaning you won’t pay taxes on gains until you withdraw the funds in retirement—when your tax rate might be lower.

4. Small Business Retirement Plan Tax Credits

The SECURE 2.0 Act provides three major tax credits:

Plan Startup Costs Credit: 100% of setup/admin costs are covered, up to $5,000 per year for three years.
Employer Contribution Credit: Up to $1,000 per employee for employer contributions, phased out over five years.
Auto-Enrollment Credit: An extra $500 per year for three years if employees are automatically enrolled.

Retirement Plans: Investing in People

For farms with seasonal or long-term employees, retirement plans aren’t just about saving on taxes—they’re a tool to help build financial security for those who help make your farm successful. Instead of offering one-time cash bonuses (which are heavily taxed and often quickly spent), retirement contributions help employees build wealth over time—and their future selves will thank you one day.

Choosing the Right Retirement Plan

The right retirement plan depends on your farm’s goals and employee structure:

SEP-IRA: Ideal for farms without employees or where contributions are focused primarily on owners. Allows contributions of up to 25% of compensation (capped at $69,000 in 2024).
SIMPLE IRA: A good option for farms with employees who want to contribute their own funds. Requires either a 3% match or a 2% contribution for all eligible employees.
401(k) Plan: Offers the highest contribution limits and the most flexibility but comes with more administrative responsibilities. Suitable for farms wanting to offer robust retirement benefits to both owners and employees.

An Example At Work: SEP IRA as an Alternative to End-of-Season Bonuses

Scenario:

6 seasonal employees, each earning $25,000 annually.
Instead of giving a one-time end-of-season bonus, the employer contributes to a SEP IRA at 5% of wages to provide employees with a long-term financial benefit.
If employees were auto-enrolled, the employer could also claim a $500 per year auto-enrollment tax credit — only applicable to 401(k)s and SIMPLE plans.

Employer Contributions:

5% of $25,000 = $1,250 per employee.
Total employer contributions: $7,500.

Tax Benefits:

✅ $2,000 estimated tax deduction for SEP contributions*.
✅ $6,000 employer contribution tax credit ($1,000 per employee).
✅ $2,000 startup costs credit (assuming $2,000 in setup/admin fees).

*Assumptions used: farm income, tax bracket and farmer contributions to own SEP.

Total Year 1 Tax Savings:

Plan costs: $9,500 (contributions and start-up costs)
Plan savings: $10,000 (deductions and credits)
Net cost to employer: -$500.
In this scenario, there’s a triple-win: tax savings, happier employees, and a better bottom-line.

No Employees? Consider a Solo 401(k) Plan

If you're a farmer without employees (aside from your spouse), a Solo 401(k) might be your best option. It allows for high contribution limits—up to $69,000 per year—and offers the flexibility to make both employer and employee contributions. You’re able to make higher contributions at lower income levels than with a SEP-IRA. Plus, it comes with significant tax advantages and allows for Roth contributions if you're looking for tax-free withdrawals in retirement.

Final Thought: Keep More, Build More

Farmers know how to play the long game—planting today for a return years down the road. A small business retirement plan is no different. Instead of spending money on something that loses value, put it somewhere that grows tax-free and pays you back when you need it most.

The IRS is incentivizing retirement savings. Might as well take advantage.

You’ve built something meaningful. Let’s make sure your finances help it thrive—reach out today.

Why Farmers Should Use Small Business Retirement Plans