Use 2022 Profitability As a Catalyst for Retirement Savings

David Marrison, Professor and OSU Extension Educator, Coshocton County, Ohio State University Extension

Typically as we move into the final quarter of the year, farm managers will start to examine their financial records in order to estimate the potential net farm income for the year and make plans on how to avoid the proverbial ”tax-man.”

All indications point to positive income returns to the dairy sector for 2022. The September WASDE (World Agricultural Supply and Demand Estimates) released on September 12 forecasted the 2022 all milk price at $25.45/cwt and estimates the 2023 all milk price at $22.70/ cwt. The remainder of the year looks favorable due to the shrinking U.S. dairy herd and increasing demand for dairy products.

Additionally, operations may have seen increased revenue due to cash grain sales, in spite of rising input costs. So, if 2022 is looking profitable, what can I do to reduce my income tax obligation? For many farm managers, it typically means prepaying expenses for the upcoming year or by investing in buildings, machinery, and equipment.

While these strategies all are useful as tax mitigation strategies, I would remind you that it is not a bad thing to have a profitable year and to pay taxes. As an added bonus, earning income and paying self-employment taxes as a farm manager has an impact on future social security retirement benefits.

For many farmers, social security will make up a sizable portion of their eventual retirement income. To qualify for future benefits under Social Security, an individual must earn 40 quarters or 10 years of wages or net profits. For 2022, the minimum earnings per quarter is $1,510. Individuals can earn up to four credits per year, making the total minimum earnings equivalent to $6,040 for 2022. Getting to 40 credits makes you eligible for benefits, but how much you will receive for retirement benefits is based on your 35 highest years of earnings. If you pay in at the minimum level, your social security retirement will be minimal. In high profitability years, managers should maximize the wages or profit that is subject to social security tax (to help with 35 high year average).

According to the Social Security Administration, the average (2022) social security income per month for a retired worker is $1,657 or $2,753 for a couple. If a retired couple has a family living of $60,000, then social security provides only 55% or $33,036 of the needed retirement income. So, this leads to the question, how will you make up the remaining amount needed for retirement and account for inflation?

So, if this year has been profitable for you, I would challenge you to examine ways to invest into retirement for you and your employees. In fact, many would contend the best investment you can make for the junior partner of a farming operation is by putting money in their retirement account, early and often. In a time when labor wage inflation is increasing, having a retirement plan as part of your compensation package is also an excellent employee benefit.

It is recommended that farmers work with a financial planner who specializes in retirement planning to discuss options. The following is offered as a primer on retirement planning options:

Individual Retirement Options- Individuals can invest after-tax dollars into certificates of deposits, bonds, stocks, and mutual funds which could serve as income sources for retirement. Individuals can also make contributions to a traditional or Roth individual retirement account (IRA) to help fund their retirement years. Let’s take a closer look at the IRAs:

Traditional IRA- With a traditional IRA, individuals contribute pre- or after-tax dollars and the money grows tax-deferred. The 2022 contribution limit is $6,000 unless the individual is over the age of 50.  If over the age of 50, the individual can contribute up to $7,000. Individuals need over $6,000 of earned income to be eligible to contribute to a traditional IRA. There are phase out limitations if the individual is eligible to participate in an employer retirement plan. Withdrawals are subject to penalty if withdrawn before 59.5 years old. Minimum distributions are required once an owner is 72 years old (70.5 if you reached this age by 1/1/2020). Withdrawals are taxed as current income. A person’s yearly IRA contribution may qualify for a deduction on the individual’s tax form.

Roth IRA- A Roth IRA is an Individual Retirement Account to which you contribute after-tax dollars. While there are no current-year tax benefits, the contributions and earnings can grow tax-free, and can be withdrawn tax and penalty-free after age 59½ and after the account has been open for five years. The 2022 contribution limit is $6,000 unless the individual is over the age of 50.  If over the age of 50, the individual can contribute up to $7,000. There are no required minimum distributions.

Business Retirement Options- Several vehicles exist for small businesses to use to help build retirement for both owners and employees. Let’s take a quick look at a few business options for retirements.

Savings Incentive Match Plan for Employees (SIMPLE) IRA- Simple IRAs are for businesses with under 100 employees. These plans allow for an employee to defer up to $14,000 of wages with an additional $3,000 if the person is over the age of 50. The employer must match the employee’s contribution (dollar for dollar) up to 3% or make a nonelective contribution of 2% of the employee’s compensation. Income taxes are paid upon distribution. These IRAs can fund retirement for both owners and employees.

401(k) Plan- 401(k) plans allow for the elective deferral of up to $20,500 ($27,000 for over 50) of salary. Employers can match 5%, 10%, 20%, or more to bring total contributions to $61,000. The employee’s deferral is limited to 100% of their wages. Employers have the option of adding Roth 401(k)s. It should be noted the percentage match that is made for a contributing owner must be the same for qualified employees.

Solo-401(k)- These 401(k) plans are for farm sole proprietorship. These plans are for a one-person business that has no full-time W-2 employees. Spouses can also contribute if they work for the business. The overall contribution limit is $61,000 for 2022 ($20,500 employee and $40,500 as employer).

Simplified Employee Pension Plan (SEP)- These plans allow for employers to set aside retirement for themselves and their employees. Employer contributes an equal percentage for all employees up to 25% of their pay limited to $61,000 in 2022. The percentage for employees has to match what is contributed for the owner. Employer contribution for employees is tax deductible. Employers do not have to make contributions every year, allowing the business some flexibility based on business conditions. 

Retirement Contribution Limits

< 50 years old

> 50 years old

Regular IRA



Roth IRA






401(k) Elective Deferral



Overall 401(k) Contributions (Employee + Employer)



SEP Contributions for employee (up to 25% of wages)



SEP Contributions for self-employed individual



More information about retirement choices for small businesses can be found at: and more information about the different type of retirement plans can be found at:

Other Retirement Sources: Besides social security benefits and individual and business retirement accounts, farm managers can also explore other options for income to fund their retirement years.  Some of these options can be found below:

  • Earnings from work while “retired”
  • Rental of land, facilities & machinery
  • Sale of land, facilities & machinery
  • Crop share lease arrangements
  • Spouse’s retirement program
  • Off-farm pensions plans
  • Saving accounts
  • Dividends from investments
  • Sale of stocks & bonds
  • Sale of personal assets & collectibles
  • Sale of personal residence (downsizing)
  • Off-farm rental properties
  • Reducing expenses
  • Consulting agreements
  • Loans from life insurance
  • My kids will provide support!

Summary: Increased profits may be realized by dairy farms in 2022. As we enter the last quarter of the year, it is recommended that farm managers crunch their financial numbers to determine whether funding retirement accounts would be a sound and wise investment for their operation. Managers are encouraged to seek professional council from financial professionals in analyzing the pros, cons, and risk of individual retirement options.


World Agricultural Supply and Demand Estimates, WASDE 628. September 12, 2022.  Access at:

Choosing a Retirement Solution for Your Small Business.  Source:

Publication 560 – Retirement Plans for Small Businesses.  Access at:

Publication 225 – Farmers Tax Guide.  Access at: