HSA – The Triple-Play of Retirement Accounts
Farmers have various retirement accounts that they can use to help fund retirement.
A SEP, 401(K) plan, profit sharing plans and related types allow a farmer to fully deduct the contributons and have tax-free deferral on the earnings. However, when the farmer takes funds out of the plan (or the heirs after death of the owner) tax will be owed on the distribution. We call this a double-play retirement plan – (1) deduction up-front, (2) tax-free growth, but fully taxable when distributed.
Retirees over age 70 1/2 are allowed to directly transfer IRA funds to a qualified charity and have those distributions be tax-free up to $100,000 per person. This helps reduce your adjusted gross income (AGI) which can help lower your income taxes or Medicare premiums if you are high earner.
A Roth IRA or a Roth Option inside of a retirement plan is also a double-play plan. However, there is no deduction up-front, but earnings are still tax-free both inside the plan and when distributed.
If the growth rate and income-tax rate is exactly the same during the life of the plan, there likely is little difference in after-tax values. However, life is never exactly the same.
Finally, the triple-play of retirement plans is a Health Savings Account (HSA). The HSA allows a deduction up-front, the earnings are tax-free and distributions are tax-free as long as the proceeds are used for qualified medical expenses. These expenses also include Medicare premiums or any qualified expenses incurred before retirement as long as you have receipts. We like to see farmers fully fund HSA’s but don’t take distributions until retirement.
One possible issue is that inherited HSAs have to be cashed in within one-year and if there are no qualified expenses to be reimbursed income tax will result.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
Any updates on FSA-510 and equipment sales. Are farm equipment sales still non ag income if ag income (without farm equipment sales) is less than 66.667% of adjusted gross income? Thank you Michael Orvik Minot, ND