Even as COVID-19 resulted in a weaker economy and the loss of millions of jobs, the pandemic ignited quite the housing boom, surprising many experts around the globe.
This is good news for real estate agents, who are enjoying the fruits of their labor now more than ever before. But it has also left many real estate agents thinking about their future: How long will this bubble last and what happens if or when the market slows? Some real estate agents are also reexamining their retirement goals and asking themselves what the best retirement plan is for real estate agents.
Truth be told, there is no one-size-fits-all retirement plan for real estate agents. Your personal financial situation and your wealth management plan all need to be considered before you decide which retirement plan would work best for you.
At Wealth Advocate Group, we know setting up the right retirement account can seem like a daunting task, so we have outlined a few retirement accounts that we think work the best for real estate agents. Of course, always check with your trusted wealth advisor before setting up an account that works for you.
The traditional IRA is one of the most common options for real estate professionals. It allows the account holder to deduct the money contributed to the account on their tax return. The earnings can grow tax-deferred until you withdraw them in retirement. If you plan to have a lower tax bracket in retirement, this means that you will be taxed at a lower rate.
The traditional IRA has a low annual contribution limit of up to $6,000, along with catch-up contributions of up to $1,000 for people over 50. (2) This could be considered one of its drawbacks, especially if you want to bulk up your retirement to make higher contributions during the housing boom.
Like traditional IRAs, Roth IRAs have a contribution limit of $6,000 yearly, or $7,000 if you are older than 50. Contributions to Roth IRAs are made post-tax and investments grow tax-free. Qualified distributions are also tax-free. (2) This may be appealing to some real estate agents, but remember that the Roth IRA does have income limits that are based on a person’s modified adjusted gross income. This means if you are a high-earner, you may not qualify for a Roth IRA.
If you are a real estate agent who employs a small team of dedicated professionals, the SIMPLE IRA may be for you. Employees participating in the SIMPLE IRA can contribute up to $13,500, and participants over the age of 50 can make yearly catch-up contributions of $3,000. (3)
Many real estate agents are reporting record earnings this year, and some may be looking to put away a bit more toward their retirement. Solo 401(k) retirement plans are also a great way for self-employed professionals to save a lot for retirement, with contribution limits at $58,000 for 2021 and annual catch-up limits at $6,500 for people who are over 50. For married couples who are working together, they have the potential of contributing $129,000 annually if they are over the age of 50. (4)
Though this retirement plan does not allow for employee inclusion, the solo 401(k) is extremely versatile for self-employed professionals and can be used to access personal loans of up to 50% of the account balance. The solo 401(k) does not need to be self-directed and many realtors use this mechanism to invest in rental properties or multi-family syndication.
Another plan that is ideal for self-employed people with a few or no employees is the simplified employee pension (SEP) plan. The SEP IRA offers tax breaks for self-employed individuals and business owners. The reason it works the best for business owners with few or no employees is that it requires proportional contributions for each eligible employee if you contribute for yourself.
Like the solo 401(k), the SEP IRA has higher contribution limits. The annual contribution limits cannot exceed the lesser of 25% of compensation or $58,000. It also can be combined with other plans, like a traditional IRA or a Roth IRA. (5)
We know that choosing a retirement plan that works for you depends on a significant number of factors. Our team at Wealth Advocate Group is well-versed in helping real estate agents choose what type of retirement plan or plans will ensure a well-managed financial future. Call 440-505-5751 or email jcohen@Wadvocate.com to schedule an appointment, or reach out to us at Contact@Wadvocate.com or 440-505-5578 to schedule an introductory consultation.
Jason Cohen is Chief Operating Officer and wealth advisor at Wealth Advocate Group, LLC, an independent, fee-based wealth management company. Jason has 15 years of experience and spends his days managing firm operations, including portfolio trading and analysis, training of new advisors, financial plan production, and client relationship management. Jason specializes in serving real estate professionals and other independent contractor business owners, helping them navigate their unique financial challenges, such as unpredictable cash flow and tax issues, so they can achieve financial independence and freedom from worry. Jason has a bachelor’s degree in public management from Indiana University and is a CERTIFIED FINANCIAL PLANNER® (CFP®) professional and believes that everyone should have access to comprehensive financial planning. He is passionate about doing his best for his clients and setting others up for success. Outside of the office, you can find Jason staying active in a variety of sports and spending time with friends and family. Learn more about Jason by connecting with him on LinkedIn.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
____________
(2) https://www.investopedia.com/terms/r/rothira.asp
(4) https://www.forbes.com/advisor/retirement/solo-401k/
(5) https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-seps
