Rutgers New Jersey Agricultural Experiment Station [Later Life Farming]

Module 5f: Savings Plans for the Self-Employed Versus IRAs

Module 5b described characteristics of various types of tax-deferred investments. Some are available to all investors (e.g., annuities), some only to workers with earned income (e.g., Individual Retirement Accounts or IRAs and 401(k) and 403(b) plans), and some only to self employed persons with business income and their employees (e.g., Simplified Employee Pension (SEP), SIMPLE, and Keogh plans). In the case of savings plans for the self-employed, SEP plans are often preferred because they have fewer administrative requirements and reporting obligations than other types of retirement savings plans.

An important decision that farmers and other self-employed workers need to make is whether to save for retirement in IRAs or plans for self-employed persons or both. In focus groups held with New Jersey farmers, several participants noted that they avoided using tax-deferred savings plans designed exclusively for self-employed persons because of the requirement to fund employees' accounts if personal contributions are made. Reasons for this included the cost of making contributions for employees, required paperwork, and uncertainty about future farm income.

It should be noted that, while you don't have to fund retirement accounts for employees (e.g., SEPs) in "lean" years, you can't fund your personal accounts either if you don't fund theirs. If you've been avoiding savings plans for the self-employed for the reasons noted above, simply focus your tax-deferred savings on plans that do not require contributions for others (e.g., Roth and/or Traditional IRAs and annuities).

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