Whether you currently own a dairy or work on one, choosing the right retirement plan to establish or participate in can be a difficult decision. With so many farmers working well beyond the age of 65, planning for retirement needs to be a priority at a younger age, although it is never too late to start.

The purpose of a retirement plan is to cover your living expenses after you quit working. Many options exist. Ask your financial planner to help you find the one that's best for you and your employees.

As independent operators, many farmers have established individual retirement accounts, or IRAs. Three types now exist - traditional, Roth, and education.

  • Traditional IRA
    With a traditional IRA, you can make contributions each year. Payouts or withdrawals can start as early as age 59.5, and mandatory payments start at age 70.5.

    For those individuals or couples with no pension plan or profit-sharing program through their employers, contributions to a traditional IRA are always tax- deductible. Even when a person or his or her spouse has a pension plan, the IRA contributions are tax- deductible when your adjusted gross income (AGI) is less than $32,000 for singles and less than $52,000 for couples.

    Changes to the tax code will gradually increase these levels. In 2005, singles in a pension program will be able to deduct IRA contributions when their AGI is less than $50,000, and couples' IRA contributions will be tax-free when their AGI is less than $80,000 in 2007.

    An unlimited amount of funds can be withdrawn from a traditional IRA without penalty for college education, and you can withdraw $10,000 for a first-time home purchase.

  • Roth IRA
    When you use a Roth IRA, all contributions are taxed, but once you begin withdrawing money at retirement, those distributions will be tax- free. Money saved for at least five years can be withdrawn tax-free and penalty- free if used for retirement after age 59.5 or for a first home purchase - up to $10,000 limit. Prior to retirement, withdrawals for certain educational expenses for yourself or for your immediate family are penalty-free, but accumulated earnings will be subject to income taxes at your current tax bracket.

  • Education IRA
    Like other IRAs, the education IRA is a tax-deferred savings account. You can invest up to $500 annually for a child's education and withdraw it tax-free for qualified higher education expenses.

Making contributions
The government permits full contributions to an education IRA or to a Roth IRA for singles with an AGI below $95,000 and couples with an AGI below $150,000. Partial contributions are allowed for singles with an AGI between $95,000 and $110,000 and for couples with an AGI between $150,000 and $160,000.

The maximum contribution to a traditional or Roth IRA is $2,000 per individual per year. The $2,000 can be put into one IRA, or split between the two types. Contributions to Roth IRAs may continue even after the taxpayer has reached the age of 70.5.

Setting up a plan for employees
If your farming operation has employees, you may want to consider a simplified employee pension (SEP) plan. For the employer, a SEP offers tax benefits, flexibility, and easy administration - and the contributions are tax-deductible. In addition, contributions to a SEP grow tax-deferred, meaning that you and your employees do not pay taxes on earnings, interest or dividends until the money is withdrawn at retirement. As an employer, you decide the amount you wish to contribute annually.

SEP plans allow employees to direct the investing of the account. In addition to the contributions made by the employer, each employee may contribute $2,000 each year to an IRA. Although your IRA contributions may not be tax- deductible, they will grow tax-deferred. You can place IRA and SEP money in the same account, which makes tracking your retirement assets easier and may save money on account-maintenance fees.

David Chlus is a first vice president of investments with Smith Barney, Inc., in Utica, N.Y., and partner in a 90-cow dairy.