Real Estate Agents Should Disaster Proof Their Retirement Plan
As a real estate agent, planning for retirement can require creativity and extra work as compared to most professions. Many real estate agents and REALTORS® are independent contractors. This means you have no employer-sponsored retirement plan in place for your future. Additionally, since income is often based on commission, it's inconsistent, and divided among other real estate professionals involved in the sale. This makes saving for retirement much more complex than for employees with a typical 9-5 job. That's why it's vital to look ahead with a plan that will support you during retirement.
Luckily, there are options available to help you save for retirement while working in the real estate industry. Since real estate careers and payment schedules can vary widely, the retirement plan that works for one real estate agent may be quite different than what will work best for you. This guide will go over some of the best options to save for retirement as a real estate agent.
Open An IRA
An individual retirement account (IRA) is a savings account with tax advantages that individuals can use to save and invest long term. There are a few different kinds of IRAs, and the kind you choose will likely be determined by your current income, the specific tax advantages provided, and your plans for the future. Anyone with earned income can open an IRA account. These accounts can be obtained through a bank, investment company, an online brokerage, or a personal broker.
A traditional IRA has no income limits and can help you reduce your current tax bill since contributions are tax-deductible. However, when the money is withdrawn, it's taxed at your ordinary income tax rate. Since the tax on your withdrawals will be based on your retirement income, it's possible you'll be paying less than if those taxes were based on your current working income. Here's what you need to know about a traditional IRA.
- Annual individual contributions cannot exceed $6,000 ($7,000 for individuals over 50) for 2021.
- Contributions are tax-deductible, depending on your income.
- If you withdraw money early (before 59.5 years of age) for reasons that are not exempt, you'll face a 10% penalty.
- Exemptions include up to $10,000 on the purchase of your first home and qualified college expenses.
- You must begin taking required minimum distributions at age 72.
- In the past, individuals over 70 years of age could no longer contribute to a traditional IRA. Since 2020, this is no longer the rule.
A Roth IRA can be a good way to get started with a retirement account early in your real estate career. The contributions are not tax-deductible. While this means that you can't save money on your taxes now with a Roth IRA, your deductions won't be taxed when you're ready to take out the money. It's important to note that there are income limits set by the IRS for contributing to a Roth IRA. If your income exceeds the limit, you can no longer contribute to your Roth IRA. However, you can convert your Roth IRA into a traditional IRA at any time. Here's what you need to know about a Roth IRA.
- Contributions are not tax-deductible.
- Withdrawals are tax-free since taxes were already paid when contributions were made.
- Income limits for contributing in 2021 are $125,000 to $140,000 for single or head of household filers and $198,000 to $208,000 for married couples filing jointly.
- Roth IRA contribution limits are the same as those for traditional IRAs in 2021.
- There are no required minimum distributions.
- You can contribute to your Roth IRA as long as you have eligible earned income, no matter your age.
A Simplified Employee Pension (SEP) IRA can be established by a business or sole proprietor. It's often used by a small business of real estate agents with few or no employees. A SEP IRA allows you to make higher tax-deductible contributions than a traditional IRA. However, you must contribute the same amount for all employees. Here's what you need to know about a SEP IRA.
- Annual contribution limits are 25% of employee earnings or $58,000, whichever is less.
- The contribution is tax-deductible on the employer's tax return.
- Distributions are taxed as ordinary income and will be penalized if unexempted withdrawals are made before the individual is 59.5 years old.
- You count as an employee, so if you contribute 25% for yourself, you must do the same for all employees.
- Employees are not allowed to contribute to their own accounts.
Open a 401k
Many people don't realize that you can open a 401k when you're self-employed. Typically referred to as a solo 401k, these plans are designed for business owners with no employees. A solo 401k plan has no age or income restrictions, allowing you to maximize retirement savings during productive years and minimize taxes if you choose a traditional solo 401k. Like IRAs, solo 401Ks are available in Traditional and Roth forms. Here's what you need to know about a solo 401k.
- Total contributions (which are made by you as an employer and employee) cannot exceed $58,000 for 2021.
- You're not eligible for a solo 401k if you have employees besides your spouse.
- A Roth solo 401k allows you to make larger contributions to your retirement on which taxes are already paid.
- Contributions to a traditional solo 401k are tax-deductible.
Real Estate Investments
As a real estate agent, you have the knowledge to take advantage of investment opportunities in the real estate market. These investments can provide you with retirement income. A common piece of advice from financial advisors is to diversify your investments. This means, instead of only depending on real estate investments to fund your future, you can use them along with your chosen retirement plan.
While you might be a great real estate investor, you don't have to stick to real estate when investing for your retirement as a real estate agent. There are a variety of investments that can help you create a diverse retirement income. Some of the most common retirement investments include:
- Annuities: Contracts purchased from an insurance company, annuities can either be immediate or deferred, and fixed or variable. They can provide an additional investment when you are already contributing the maximum amount to your retirement account.
- Bonds: A bond is a loan that you pay to an entity or government agency that gains interest over time. When the bond matures, its face value is returned to you. Bonds are a lower-risk investment which often means lower returns.
- Retirement Income Funds: A type of mutual fund, retirement income funds automatically invest your money into a diversified portfolio of stocks and bonds.
There are several apps that can be used to help track retirement savings and investment choices. Check out these popular apps to decide what works best for you.
- Personal Capital: An investment tracking tool that can connect all your financial accounts, and is free, is a clear winner for most savers.
- Morning Star: This tool requires you to manually enter and update data, but gives you a wealth of information in return. Offers free and premium accounts.
- Stash: A retirement calculator with customized recommendations, this tool has free options and plans that start as low as one dollar a month.
- Vanguard: Offers retirement planning tools that include a retirement plan loan calculator designed to help you weigh the true cost of a 401k.
How To Choose The Best Retirement Plan As A Real Estate Agent
It's never too early to start planning for retirement. Learning how to budget your real estate income is an important part of becoming a successful real estate agent. When you choose to make your retirement savings a part of that budget, saving for the future is as easy as paying for other essentials. Still, with so many options to choose from, it can be difficult to decide what type of retirement plan is best for you. Since retirement planning options have different features designed for various methods of saving money now and in the future, it's important to consider the unique elements of your current lifestyle and your plans for the future. Consider these questions to figure out the retirement plan that's best for you.
- Are you starting out with limited income? A Roth IRA provides benefits for individuals that fall within a certain income bracket.
- Are you hoping to get a tax break this year? Traditional IRA contributions are tax-deductible.
- Are you self-employed, without employers, and hoping to invest in higher contributions? A solo 401k can help you meet those goals.
- Are you looking for a plan that will include a few employees and let you take advantage of high-profit years? A SEP IRA might be your best option.
- Are you looking for ways to diversify your savings into multiple retirement income streams? Consider the benefits of a financial plan that includes real estate investments or other retirement investments alongside your retirement plan.
If you don't already have a financial planner, now might be the time to consider seeking one. A certified financial planner can help you understand the fine points of each retirement option and how they'll help you with financial planning now and in the future.