Money Must Reside Somewhere in Your AG Business During 2020, Where Is Yours?
InsightsWhere is your money currently flowing to?
Agribusiness and farmers/ranchers often have a lot of money tied up in equipment, land, seed, fertilizer, livestock, buildings and other supplies.
What about the money that will be used to purchase these things in the future though?
The reason you have invested in these things is that they produce cashflow, and that flow of money to you needs a good warehouse until you’re ready to deploy it!
What are your options?
1. The first place everyone thinks of is the traditional bank. You deposit your money into a checking or savings account and have fast easy access to your funds. You could also opt for a Certificate of Deposit (CD) to lock in what would typically be a higher interest rate for leaving your money with the bank for a specified period of time.
Benefits
- Ease of use
- Online access
Drawbacks
- Loss of purchasing power due to inflation
- Dollars placed here have a single use (that’s being liquid and ready to use at a moment’s notice)
- Interest earned is taxed every year
- Contributions aren't tax deductible
2. A second place where dollars are often positioned would be qualified plans. These are often invested in stocks, bonds and mutual funds (mutual funds are a mix of individual stocks, individual bonds, or money market funds, and can own a combination of all 3). Target date mutual funds have become very popular as they are a set it and forget it sort of option, changing the mix of stocks and bonds in your portfolio as you get older.
Benefits
- Potential tax deferral to keep you in a lower tax bracket (this would not be a ROTH)
- Chance for high rates of return
Drawbacks
- Loss of control, liquidity, and access to money
- Here are a couple exceptions for potential access before age 59½ (not an all-inclusive list)
- Total and permanent disability
- Health insurance premiums paid while unemployed
- First time home purchase
- Equal periodic payments
- Potential for loss
- Penalties and restrictions to use money
- Postpone taxes to future date with unknown tax bracket (this would not be a ROTH)
- Dollars placed here have a single use (hopefully grow for the future)
3. Another potential place to position your cashflow in is a brokerage account. Dollars that go to these accounts are used to purchase securities like stocks, mutual funds and ETF’s.
Benefits
- Chance for high rates of return
- Accessibility- no limitations or fees for withdrawals
- Potential for favorable tax treatment depending on length of time you hold a stock for example
Drawbacks
- Potential for loss
- As a general rule of thumb when placing money in the market you don’t want it to be money you need immediate access to, a 5-7 year time horizon is more ideal
- While you have accessibility, will you really want to withdraw money if your account takes a 20-50% haircut? You must realize this can happen quickly at any time.
- Contributions aren't tax deductible (unless structured within a qualified plan)
The option not often talked about.
As an alternative to the typical advice you would receive of where to accumulate money, you could use a high cash value dividend paying whole life insurance policy with a mutual company. This type of contract builds cash value immediately which you can access by withdrawals or policy loans.
Benefits
- Control
- Competitive rate of return when you look at the volume of dollars you have access to
- Guaranteed growth every year as long as you pay premium
- Potential to earn dividends which aren’t guaranteed, but once paid become part of your guaranteed cash value
- Multiple jobs for 1 dollar (protection, growth, and waiver of premium to continue funding if you become disabled)
- Access to funds in 3-5 business days
- Flexibility in premium payment amount and loan payback schedules
- Minimize future tax burden
- The ability to access your money tax free with proper structure and implementation (both are CRITICAL)
- If your ag business is an LLC or other legal entity you could earn interest on your dollars in the whole life policy and get a tax deduction for policy loan interest paid (consult your tax professional for guidance on this, WE DO NOT GIVE TAX ADVICE)
- An asset that is instantly worth more when you pass away
- Online portals to view policy and make premium and loan payments
Drawbacks
- Contributions aren’t tax deductible
- Small loss of liquidity when starting a policy
Look closely at each system before accumulating capital.
All the above systems can be used to accumulate capital. Each has advantages and disadvantages, and what you are really trying to do will help determine where your money should go.
What is the purpose is where I need to start to help you know what to do?
If you need access to money in the short term, which I would define as less than 7 years, you likely won’t want to be in the market due to the volatility. While the market does tend to move up it does correct and can take significant amounts of time to recover. You should also ask yourself if you know enough about the market that you’ll be comfortable putting money there.
A qualified plan is not ideal unless you don’t plan to use the money until after age 59½. You also need to be aware that if you’re not contributing to a ROTH that a deferral in tax is better said as postponing the tax.
Is that your goal?
Traditional banks offer convenience as the most attractive feature to leave money with them. It is not ideal to leave very much money with them though as inflation continually erodes purchasing power.
Properly designed high cash value dividend paying whole life insurance with a mutual company is useful for the short and long term. This financial asset not only gives you access to capital, but also allows your money to grow. With mutual companies the policyholders are the owners of the company and profits are shared through the dividend. Dividends are not guaranteed, but they can become quite large over time when payed (the companies I work with have paid dividends for over 100 years running).
A deep look into why you accumulate capital.
Let’s look at a simple example for a farmer.
Each year you have expenses that need to be paid like rent or property tax, income tax, seed, fertilizer, chemical and equipment repairs. You know that you will have these expenses coming every year.
So, what do you do?
You take your cashflow in and likely deposit it with a traditional bank in a savings or checking account. This is where you are typically taught to accumulate capital. You continue to do this with checks from grain or produce, or other income your farm generates. Then when a bill such as one I have listed comes due, you write a check or swipe a card and that is cashflow out.
There are 2 problems with this traditional system.
- Your money isn’t working for you in the traditional bank in today’s environment with interest rates near rock bottom.
- Dollars that leave this cashflow management system NEVER work for you again.
If the reason for using the traditional bank is to be your cashflow management system, couldn’t you do this somewhere else that offers fast access to money?
Paying premiums to a properly designed high cash value dividend paying whole life insurance policy with a mutual company could be your cashflow in. With the flexibility this type of contract offers you could continue to make premium payments as you received cashflows in. Then when a bill comes due you can borrow against your policy and pay it back at your discretion because there is no set repayment schedule. Here is a short post about how to access money from your policy.
Banking is simply the process of moving money, it’s not a building that they call a bank.
Look at the benefits each system offers. It’s easy to see a lot of systems could be used to perform the banking function when you look at the simple process that is happening.
Where do you want your money to reside?
A system that provides flexibility.
After reviewing 4 places that money can reside, the last thing I want to address is flexibility.
3 of these systems give you access to funds without restrictions and penalties (traditional bank, brokerage account, whole life insurance). Of these 3, 2 are not subject to volatility (traditional bank, whole life insurance), and only 1 of the final 2 offers meaningful growth (whole life insurance).
With whole life insurance you also get to choose how to finance your operation. You can use policy loans and withdrawals, or assign your policy as collateral to use a traditional bank if that’s what you choose.
My point is with money residing here you have flexibility of choice and you’re in control because you have the gold. “Those who have the gold make the rules.” –R. Nelson Nash
To succeed in the ag industry in 2020 you need every advantage. Picking the right place for your money to reside is one more way for you to help your business excel.