Many factors may have drawn you to the real estate field: flexible schedules, career growth, mobility, or the potential for significant, uncapped earnings. But what about when you decide you’ve shown your last property and are ready to move into the next phase of life and enjoy retirement?
There are multiple retirement options available to agents, but some investment products are better than others. Real estate agent IRAs are a great option, particularly self-directed IRAs, which provide both flexibility and the opportunity to use your vast knowledge of the industry to establish passive income for your retirement.
Let’s explore some retirement options for real estate agents and provide some tips to help you save for retirement.
Best Retirement Accounts for Realtors
1. Self-Directed IRA
- 2023 Contribution limit: $6,500 ($7,500 if you’re over 50) annually.
- Tax structure: Tax-deferred (Traditional) or tax-free (Roth)
A self-directed IRA (SDIRA) is a retirement account that functions similarly to a traditional or Roth IRA but allows account holders to invest in alternative assets. Instead of limiting investment opportunities to stocks, bonds, mutual funds, and other common assets, SDIRAs allow you to invest in things like real estate, mortgage notes, and precious metals.
2. Solo 401(k)
- Contribution limit: $66,000 ($73,500 if you’re 50 or older; employee and employer combined for year)
- Tax structure: Tax-deferred (Traditional) or tax-free (Roth)
A Solo 401(k) is a retirement plan structured for independent contractors, like real estate agents, and business owners. It operates similarly to a 401(k), but like an SDIRA, you can invest in common assets, such as stocks, and alternative assets, such as real estate.
You can contribute to this type of retirement account as long as you are self-employed and don’t have full-time employees.
3. Employer 401(K)
- Contribution limit: $22,500 annually
- Tax structure: Typically, tax-deferred but tax-free Roth accounts are available.
Employer 401(k)s are retirement accounts that are implemented by your employer. Contributions are typically taken out of each paycheck, and your employer may make contributions in addition to those you elect.
If your employer offered a 401(k), it’s wise to consider opting into it, especially if they contribute to the account. This type of retirement account gives you limited say over how funds are invested, but if a 401(k) doesn’t align with your investment plans, you can rollover funds from a 401(k) account to an SDIRA tax- and penalty-free.
4. SEP IRA
- Contribution limit: The lesser of $66,000 or 25% of your adjusted earnings.
- Tax structure: Tax-deferred
A Simplified Employee Pension Plan (SEP IRA) is designed for small business owners, independent contractors, and other self-employed individuals. You can leverage this plan if you’re a small business owner who wants to set up and fund retirement accounts for their employees. SEP IRAs have a significantly higher contribution limit than a standard IRA or SDIRA, making it a good option if you have an aggressive retirement savings strategy.
Compare retirement plans by contribution limits and tax structure.
| Contribution limits | Tax structure | |
| IRA | $6,500 ($7,500 if you’re 50 or older) annually | Tax-deferred (traditional IRA) or tax-free (Roth IRA) |
| SDIRA | $6,500 ($7,500 if you’re 50 or older) annually | Tax-deferred (traditional IRA) or tax-free (Roth IRA) |
| Solo 401(k) | $66,000 ($73,500 if you’re 50 or older) | Tax-deferred (traditional) or tax-free (Roth) |
| SEP IRA | Lesser of $66,000 or 25% of compensation | Tax-deferred |
| Employer 401(k) | $22,500 annually | Typically tax-deferred but if Roth 401(k) is available tax-free. |
How to Save for Retirement as a Real Estate Agent
The thought of saving for retirement may not always be front of mind, and when it is, it can be daunting to get started. However, three considerations can help put you on the right track.
Evaluate your financial goals.
What does your retirement look like, and how much do you need to start saving now to meet those goals? How much of your current income can you budget for retirement savings? What, if any, retirement savings are available to you? These questions can help you establish a baseline for savings.
Not sure if you’re crunching the numbers right? Speaking to a financial advisor can be beneficial. They can take a holistic approach to your entire financial picture and provide practical retirement guidance.
Choose a retirement plan.
Some real estate agents can take advantage of employer-sponsored retirement plans like 401(k)s, but that may not be available to everyone. And even if it is, leveraging an alternative plan or adding another retirement product to your retirement strategy may be worth considering.
Traditional and Roth IRAs are always an option, but for more flexibility, real estate agents should consider products like self-directed IRAs or Solo 401(k)s. These accounts, which are described below, often make it easier for real estate agents to capitalize on their skill set in a way that increases wealth over time.
Leverage your own experience.
As a real estate agent, you have a wealth of knowledge that can make it easier to grow substantial retirement savings. And while that can be true for standard retirement plans that allow you to invest in things like Real Estate Investment Trusts (REITs), it’s even more so if you opt into an account that lets you invest directly in property. That’s why real estate agent IRAs, when self-directed, are optimal for capitalizing on skill and opportunity alike.
Benefits of a Self-Directed IRA for Real Estate Agents
1. Tax benefits
If you choose a traditional SDIRA, your contributions are tax-deductible and those contributions can grow tax-free while in the account. The same is true of real estate-driven income, such as lease or rental payments, that pass directly back into the account.
Keep in mind that you cannot deduct Roth contributions, as they are taxed before entering your account. However, contributions and earnings will grow tax-free.
2. Build Passive Income for Retirement
Some SDIRA assets, especially real estate, allow you to build passive income. As such, you can use your professional skills to invest in property opportunities in the name of your IRA. If you rent or lease the property (or flip and sell), the earnings go directly back into the IRA account, allowing you to continue to build passive wealth.
3. Rollover Existing Funds Tax-Free
If you have an existing retirement account, such as a standard IRA, you can use the money in that account to fund your SDIRA. Moving the funds in this manner is known as a rollover, and it is tax-free and penalty-free.
Rollovers can be direct or indirect. Direct rollovers move funds directly from one account to the other. You’ll never have possession of the funds. During an indirect rollover, also known as a 60-day rollover, you take possession of the funds from the original account and have 60 days to deposit them into the new SDIRA account.
If the funds are not deposited within 60 days, then you’ll face taxes and potential penalties per IRS laws (If you are over age 59 1/2 then that 10% penalty is not applicable, just the net amount becomes taxable).
4. Greater Diversity and Flexibility
One of the primary reasons investors turn to SDIRAs is the flexibility they provide. By leveraging traditional assets, like stocks and mutual funds, as well as alternative assets, like real estate, you can create a robust portfolio that can weather ebbs and flows in the market. It also makes it easier to take advantage of passive income opportunities, such as that sustained by real estate.
5. Familiarity with the Real Estate Field
Perhaps the biggest benefit of opening an SDIRA as a real estate agent is your knowledge of the real estate field. As you likely know, property transactions and management can be complex to novice investors unfamiliar with the territory.
However, your industry-based knowledge increases the likelihood of not only finding solid investments but also knowing how to execute transactions promptly. And, since flipping properties can yield high returns, you’re also well suited to make important decisions if you decide to sell the property.
One word of caution, however. There are strict rules about how you–the IRA account holder—can engage with property your IRA purchases. You cannot personally benefit from the property, nor can disqualified persons such as your spouse or children.
That means you can’t use your IRA to purchase a property you plan to live in or maintain office space in. You also must use IRA funds for related expenses, such as renovations, management, property taxes, or any utility bills.
FAQs
Can a retirement plan hold real estate?
A standard retirement account, such as a traditional IRA or 401(k) cannot hold real estate. If you want to hold real estate in your retirement account, you must open a self-directed IRA or a Solo 401(k).
At what age can I make tax-free withdrawals from my SDIRA?
You can generally make penalty withdrawals from your SDIRA at the age of 59 ½.
If you have a Roth IRA, you can withdraw from contributions without penalty as long as your account is open for five years or more. However, any withdrawals from earnings will face a penalty.
Can I roll over a 401(k) into an IRA without paying taxes?
Yes, you can roll over a 401(k) into an IRA without paying penalties. The best way to do this is by using a direct rollover, which moves money directly from the 401(k) to the IRA.
You can also use an indirect rollover, also known as a 60-day rollover. In this case, you take possession of the funds in the 401(k) and are responsible for depositing them in the new IRA within 60 days.
If you fail to meet the 60-day deadline, it will be taxable income, and it could be subject to the 10% early withdrawal tax if you are under age 59 1/2.
