Secure Your Future: Retirement Accounts for Independent Realtors

For many real estate professionals, becoming self-employed brings greater freedom and flexibility. However, it also means you must take control of your retirement planning. Without an employer to set up benefits, choosing the correct accounts, making contributions, and selecting proper investments is up to you. You can build a strong financial future by understanding your options and staying organized.

Understanding Your Retirement Account Options

As a self-employed Realtor, you have the power to choose from several tax-advantaged retirement accounts. Whether you’re just finishing real estate school or have years of experience, understanding the basics of each account type empowers you to make the right decisions for your business and your future.

Shared Retirement Accounts for Realtors:

1. Traditional IRA:

• Contributions may be tax-deductible.
• Money grows tax-deferred until withdrawn, usually starting at retirement age.
• The annual contribution limit in 2024 is $7,000 if you’re under 50 and $8,000 if you’re 50 or older.* Please verify on the IRS website.

2. Roth IRA:

• Contributions are made with after-tax dollars.
• Withdrawals in retirement are usually tax-free if rules are followed.
• The annual contribution limit for 2024 is also $7,000 (under 50) and $8,000 (50 or older), but income limits apply.*

3. Solo 401(k):

• Designed for self-employed individuals with no employees (other than a spouse).
• Higher contribution limits than IRAs. For 2024, you can contribute up to $23,000 as an employee if you’re under 50, plus an employer contribution that can bring the total to around $66,000.*
• Offers Roth contributions inside the plan if allowed by the provider.
• You may allow loans from your account (subject to specific rules).

4. SEP IRA (Simplified Employee Pension IRA):

• Employer (you) makes contributions for yourself and any eligible employees.
• Contributions are a percentage of each employee’s pay and must be the same for all eligible employees.
• For 2024, contributions can be up to 25% of your net self-employment income, up to a maximum of $66,000.*

*Note: These limits can change yearly. Always check the latest rules on the IRS website.

Choosing the Right Account for Your Situation

The best retirement account for you depends on your income level, tax strategy, and whether you have employees. For instance, if you anticipate being in a higher tax bracket in the future, a Roth IRA’s tax-free retirement withdrawals might be appealing. If you aim to reduce your taxable income now, a Traditional IRA or a Solo 401(k) might be more suitable.

Always check with a financial advisor or tax planner before making decisions.

Key Considerations:

• Current vs. Future Tax Brackets:

If you believe taxes will be higher later, choosing a Roth option could help you avoid hefty tax bills in retirement.

• Contribution Limits:

Solo 401(k)s often let you contribute much more than IRAs. If you earn enough, this could help you save more aggressively.

• Employees and Business Growth:

A SEP IRA might be more straightforward if you have or plan to have employees. Remember that you must contribute the same percentage for everyone, which can get expensive as you add staff.

Maximizing Contributions

Try to contribute as much as you can. Over time, even small increases can make a big difference due to compounding growth. Set up automatic transfers so you don’t forget to invest. Keep track of changing contribution limits each year—these are usually adjusted for inflation.

Diving Deeper into Solo 401(k)s

A Solo 401(k) stands out because of its high contribution limits and flexibility. Beyond your contributions, you can often include Roth funds inside the plan, giving you tax-free growth on that portion. Some Solo 401(k) plans also let you borrow from your balance, which can be helpful in emergencies, though it’s generally best to leave your retirement money invested long-term.

SEP IRAs and Employee Contributions

A SEP IRA can make contributions straightforward if you own a real estate business with employees. You contribute a set percentage of each person’s compensation, including yours. While this keeps the plan fair, you must consider the total cost if you have multiple employees.

The calculation is based on your net self-employment income, and it’s wise to talk to a tax professional to ensure you’re following the rules correctly.

Making Smart Investment Choices

Once you’ve selected your retirement accounts, the next step is to decide how to invest your funds. While it might be tempting to focus solely on real estate-related investments, it’s generally safer to diversify your portfolio across different types of assets.

Suggested Investment Mix:

• Low-Cost Index Funds: Cover broad parts of the market at a low fee.
• Target-Date Funds: Adjust your investment mix as you approach retirement, making them easy “set-it-and-forget-it” options.
• Blue-Chip Stocks: Shares in well-established companies.
• Bonds: Help balance the risk of stocks and add stability.
• Real Estate Investment Trusts (REITs): Offer a way to invest in real estate without directly owning property.
• Cash or Money Market Funds: Provide liquidity for emergencies and short-term needs.

Real Estate Investments Inside Retirement Accounts

You may be interested in holding real estate or related assets inside retirement accounts as a Realtor. This can be done through self-directed IRAs or specific Solo 401(k) plans. But be careful:

• Prohibited Transactions: The IRS has strict rules about using retirement funds for real estate. For example, you generally can’t use your IRA-owned property for personal use or manage it yourself without following specific guidelines.
• Complexity and Expenses: Setting up a self-directed IRA to invest in actual properties can be complicated and may incur extra fees. Before going this route, make sure you understand all the rules and possible penalties.

Tax Benefits and Future Withdrawals

The main advantage of these accounts is their tax treatment. Traditional IRAs and 401(k)s offer tax-deferred growth, meaning you don’t pay taxes until you take the money out in retirement. Roth accounts grow tax-free, so while you pay taxes now, you can skip them later. The idea behind a Roth IRA is to pay taxes upfront while you're likely in a lower tax bracket, so you can enjoy tax-free withdrawals later in retirement when you might be in a higher tax bracket.

Don’t forget that many accounts have Required Minimum Distributions (RMDs) starting at a certain age. Failing to take RMDs can lead to hefty penalties, so plan.

Education and Professional Help

Your real estate background and training help you understand market trends and make informed investing decisions. Still, consider working with a financial advisor or tax professional specializing in helping Realtors. Their guidance and what you’ve learned from real estate school and industry experience can keep you on track.

Regular Reviews and Adjustments

Review your retirement strategy at least once a year. As your income, business structure, and personal goals change, you might need to adjust your contributions, try different investments, or switch account types. Staying flexible ensures that your retirement plan grows with you.

By choosing the correct accounts, maximizing your contributions, selecting suitable investments, and following the rules carefully, you can create a retirement plan that will support you well after you’ve closed your last deal.

Love,

Kartik