Retirement Planning Tips for Self-Employed Real Estate Agents

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Saving for retirement is an important step for any professional. This ensures you can live comfortably after you retire. Many experts recommend professionals start saving at least 15% of their pre-tax salary for retirement.

However, without an employer-sponsored 401(k), this can be more challenging. Self-employed real estate agents need to consider their financial options without the direction of a company to provide a 401(k) and contribution match. Fortunately, real estate agents have many great opportunities. Here are some tips for successfully planning your retirement.

Retirement Options for Self-Employed Agents

1.  Roth IRA

This is an individual retirement plan that is funded using your post-tax income. This means you can’t use a Roth IRA contribution as a way to receive a deduction on your income taxes. Although, once you pull out the funds, you don’t have to pay taxes.

Keep in mind that Roth IRAs have income restrictions and contribution limits. In 2020, the contribution limit was $6,000 for those under 50 and $7,000 for those 50 and older. So, this strategy is good for those who earn a lower income or don’t rely heavily on tax breaks.

2. Traditional IRA

A traditional IRA is similar to a Roth IRA, but the contributions may be tax-deductible. If you take money out from the account before age 59, you have to pay a 10% penalty tax. Although, you can be exempt if you’re using the funds to purchase your first home or pay for education expenses. Also, when you withdraw the cash, it will be taxed as ordinary income. Once you turn 70, you are required to start taking funds out of the account. 

This is a good strategy for those with a higher income, who may benefit from initial tax deductions.

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3.  Solo 401(k)

Even if you don’t have an employer, you can still fund a 401(k). The contributions are pre-tax and can help to reduce your annual taxable income. However, once it’s time to take out the cash, it’s counted as taxable income.

There is also a limit to the amount of funds you can add. In 2020, the government increased the contribution limit to $19,500 for employees. If your spouse earns income for your business, you can include it in your solo 401(k) as well.

This is a good strategy for investing more money. It also offers you more flexibility because you can choose between a traditional or Roth IRA. Another advantage is that you can take a loan from your account to help pay for business expenses.

Retirement Options for Agent Business Owners

Are you self-employed but in charge of your own real estate business? The following three options might be good for your organization. They will allow you to provide retirement options for any employees as well as caring for your own financial needs.

4.  SEP IRA

This is a good plan if you have fewer employees within your business. As an employer, you must make equal contributions to each employee’s account. The benefit of this type of plan is that it has lower startup and operating costs. It also has a higher contribution limit than traditional IRAs. Also, these contributions are tax-free.

5. Simple IRA

A simple IRA is best for mid-sized businesses. Like a traditional IRA, the money put in is tax-deferred until it’s been withdrawn. Unlike a traditional IRA, the account is set up by you as the employer. You must match contributions up to 3% of your compensation or make a 2% non-elective contribution.

It’s also easy to set up an account, and there are no IRS filing requirements. The costs are also generally low to maintain the account. One thing to keep in mind is that there may be a lower contribution limit.

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6. Defined Benefit Plan

If your real estate business has a solid cash floor and you want to invest more, consider this option. This program pays benefits based on certain factors, such as the length of employment. A pension is an example of a defined benefits plan. You can either receive fixed monthly payments or get the cash all in one lump sum.

The main benefits of this option include: 

  • You can see rewards over a short period of time
  • You can contribute and deduct more than under other retirement plans
  • Benefits don’t depend on asset returns
  • Flexible scheduling
  • Plans can be used to promote certain business strategies

Keep in mind that a defined benefit plan is a more costly and complex plan to administer. Also, if you don’t meet the annual minimum contribution, there is an excise tax.

Tried and True: Buy Rental Properties

Real estate professionals, whether self-employed or not, can use their expertise and education to take advantage of one of the most time-tested retirement strategies: real estate investment.

Rental properties provide an additional source of income. This cash can then be invested into your retirement accounts. Consider using one of the IRAs listed above. The extra money also allows you to save your primary salary for everyday expenses. 

When purchasing a property, make sure to find the right location and secure a down payment. The capital required to begin investing in real estate can subsequently be used to scale up your portfolio and help your nest egg grow for retirement.

How to Save for Retirement as a Real Estate Agent

When it comes time to leave your job, you want to feel secure knowing you have savings already lined up. Being self-employed requires a little more planning. To get started, follow these tips to plan your retirement successfully.

About the Author: Evelyn Long is the editor-in-chief of Renovated, an online resource for the real estate market. Her freelance writing has been published by the National Association of REALTORS®, Insights for Professionals and other prominent industry magazines.

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