Retirement Plans for Farm Owners: SEP IRA, Solo 401(k), and Defined Benefit Options for Farmers

Farming income swings from year to year. A bumper crop followed by a drought, a spike in commodity prices followed by a crash, a government payment that arrives in one lump sum. This variability makes retirement planning harder than it is for a salaried professional with predictable income, but it also creates opportunities. A farmer who shelters $72,000 in a good year and contributes nothing in a bad year can build a substantial retirement account while reducing taxable income precisely when the tax rate is highest.

How does a SEP IRA work for a farmer?

The SEP IRA (Simplified Employee Pension) is the easiest retirement plan to establish and maintain. For current guidance, see IRS Retirement Plans for Small Business. The farmer can contribute up to 20% of net self-employment income (net farm profit after the SE tax deduction), with a maximum of $70,000 for 2025. There are no annual filing requirements (no Form 5500), no plan document beyond the IRS model (Form 5305-SEP), and contributions are discretionary, meaning the farmer can contribute the full amount in a profitable year and nothing in a loss year.

For a sole proprietor (Schedule F), “net self-employment income” for SEP purposes is net farm profit reduced by 50% of the SE tax. The effective contribution rate for a sole proprietor is 20% of that reduced figure (not 25%, because the contribution base is reduced by the contribution itself, creating a circular calculation that nets out to about 20%).

The SEP IRA has one significant limitation for farms with employees: if the farmer makes a SEP contribution for themselves, they must also contribute the same percentage for every eligible employee (those who are 21+, worked for the farm in 3 of the last 5 years, and earned at least $750). For a farm with several full-time employees, the cost of the employee contributions can outweigh the benefit of the owner’s contribution.

When is a Solo 401(k) better than a SEP?

The Solo 401(k) (also called an individual 401(k) or one-participant 401(k)) is available to self-employed individuals with no full-time employees (a spouse can be an employee). It provides two contribution streams:

Employee deferral: Up to $23,500 for 2025 (indexed; $24,500 for 2026 per IRS Notice 2025-67). This is a flat dollar amount, not a percentage of income, so it provides the same contribution regardless of income level (as long as income exceeds the deferral amount).

Employer contribution: Up to 20% of net SE income (same calculation as the SEP).

The combined limit is $70,000 for 2025 ($72,000 for 2026). For farmers age 50-59 and 64+, a $7,500 catch-up contribution is available. For ages 60-63, SECURE 2.0 created a super catch-up of $11,250 (for 2025, indexed).

The Solo 401(k) also allows Roth contributions on the employee deferral side, which the SEP does not (SEP contributions are always pre-tax). A Roth Solo 401(k) deferral is not deductible in the current year, but the account grows tax-free and withdrawals in retirement are tax-free. For a young farmer who expects to be in a higher tax bracket at retirement, the Roth option can be valuable.

The Solo 401(k) requires a plan document (more complex than the SEP’s one-page form) and annual filing of Form 5500-EZ when plan assets exceed $250,000. It must be established by December 31 of the year for which contributions are made (unlike the SEP, which can be established up to the filing deadline including extensions).

When does a defined benefit plan make sense?

A defined benefit (DB) plan promises a specific annual benefit at retirement (up to $280,000 per year for 2025, indexed). The annual contribution is the amount needed to fund that promised benefit, calculated by an actuary based on the participant’s age, years to retirement, investment returns, and the target benefit.

For an older farmer (age 55+) with consistently high income, the DB plan can produce the largest contributions of any retirement plan type. A 58-year-old farmer planning to retire at 65 might contribute $150,000-$250,000 per year, far exceeding the $70,000 Solo 401(k) limit.

The catch is that the DB plan requires consistent annual funding. If the farm has a lean year, the farmer must still make the required contribution (or risk plan termination and penalties). This makes the DB plan a poor fit for farms with highly variable income unless the farmer has other sources of funds to meet the contribution in bad years.

A common strategy is to pair a DB plan with a 401(k) plan: the DB plan provides the large deductible contribution in high-income years, and the 401(k) provides a smaller, flexible contribution in lower-income years. The farmer can freeze or terminate the DB plan if income drops for an extended period.

What about farms with employees?

Farms with full-time employees must include eligible employees in the retirement plan. This changes the calculus significantly:

SEP IRA: The employer contribution percentage must be the same for all participants. If the farmer contributes the effective 20% of net SE income for themselves, every eligible employee gets 25% of pay. For a farm with five employees earning an average of $40,000, the employer cost is $50,000 (5 x $40,000 x 25%) on top of the owner’s contribution.

Safe Harbor 401(k): The employer makes either a 3% nonelective contribution (to all eligible employees, regardless of whether they contribute) or a 4% match (dollar-for-dollar up to 3% of pay, then 50 cents on the dollar for the next 2%). The Safe Harbor contribution is generally less expensive than the SEP’s equal-percentage requirement, and it eliminates the ADP/ACP nondiscrimination testing that could otherwise limit the owner’s contributions.

SIMPLE IRA: Available for employers with 100 or fewer employees. The employer matches employee contributions dollar-for-dollar up to 3% of compensation (or makes a 2% nonelective contribution). Employee deferral limit is $16,500 for 2025 ($17,000 for 2026), or $17,600 for 2025 ($18,100 for 2026) for employers with 25 or fewer employees. The SIMPLE IRA is simpler to administer than a 401(k) but has lower contribution limits.

For farms with seasonal workers, the eligibility rules matter. Most plans can exclude employees who work fewer than 1,000 hours per year, which typically excludes seasonal farmhands. This allows the farmer to maintain a retirement plan that covers only year-round employees (and the owner).

How does farm income variability affect plan design?

The key is matching the plan type to the income pattern:

Highly variable income (good years and bad years): SEP IRA or Solo 401(k) with discretionary contributions. No mandatory funding requirement. Contribute the maximum in good years, contribute nothing in bad years.

Consistently high income: Defined benefit plan (possibly paired with a 401(k)). The DB plan’s mandatory funding is manageable when income is reliable, and the contribution limits are much higher.

Late career, high income, catching up: DB plan with a short funding period. A 60-year-old farmer with five years to retirement can make very large deductible contributions to fund the promised benefit quickly.

Young farmer, moderate income: Roth Solo 401(k). The lower tax bracket makes Roth contributions more efficient (pay tax now at a low rate, withdraw tax-free at a potentially higher rate in retirement).

Related guides:

• Agriculture Farm Entity Structure Llc Partnership
• Agriculture Farm Tax Deductions Expenses
• Agriculture Livestock Tax Treatment Raised Purchased
• Agriculture Self Employment Tax Farm Income

Related guides:

• Retirement Plans for Cleaning Business Owners: Solo 401(k), SEP, and Plans with Employees

• Retirement Plans for Gym Owners and Personal Trainers: How to Shelter $24,500 to $250,000+

• Retirement Plans for Independent Consultants: SEP IRA, Solo 401(k), and Defined Benefit Strategies

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.