Last updated on November 11th, 2024 at 07:34 pm
Last Updated on November 11, 2024 by
Very few real estate agents that I speak with have any idea of how to save for retirement. Retirement savings are critical for real estate agents because they are not earning a pension. Social Security alone will not be sufficient for most people so real estate agents must supplement their retirement income. The good thing is that as a small business owner, there are options such as a self-directed IRA which we will be discussing. You may be doing some real estate investing as part of your retirement planning but it is not enough.
Retirees will need a constant stream of income to back up their social security benefits in their golden years. You may have short-term rentals or other real estate assets but those assets are not cash. You will need cash that has been saved in the event of any issues with your second home or other investment property. Owing property is of course an excellent way to plan for retirement but it should be supplemented with regular deposits into your SEP IRA and Roth IRA.
Retirement is all about cash flow. You need enough each month to live on. You may be lucky and have paid enough into Social Security to draw a large benefit each month. This benefit may be sufficient to take care of most things in the early years. When you need a larger sum for medical issues or to support your even older parents, that well-thought-out retirement plan will come in handy.
Consider a SEP IRA or Solo 401(k)
You may be fortunate to work a job and be a real estate agent where your employer-sponsored retirement plan is in place. Should this be the case, use that plan along with a Roth IRA to build the cash you need for retirement. Real Estate agents who are fully self-employed Realtors without an employer contribution must create their own type of retirement plan.
The SEP-IRA and the Solo 401(k) plans permit employer contributions. If you are a very successful real estate agent earning upwards of $100,000 per year or more, you can build your tax-deferred retirement plan very fast. These plans far exceed what a person would be able to do as an employee for a typical company.
Income earned from the sale of Real Estate does not come in on a regular basis so telling you to make a monthly contribution for consistency may not be appropriate. When you get that commission check, you must decide what portion will be deposited into your retirement account. There is an IRS-imposed limit on all of the various choices you have for retirement investments.
list of plans and limits
Now that you understand the various retirement accounts that you can open, what if you want more than one? For example, if you want a Solo 401(k) can you also open a SEP IRA or a Roth IRA? The following explains more about your options:
Retirement Accounts for Self-Employed Individuals (2025)
A self-employed individual may open more than one retirement account to maximize savings, but they must adhere to specific rules and contribution limits. Below is a table outlining the types of retirement accounts available and which combinations are possible.
| Account Type | Contribution Limit (2025) | Can be Combined With |
|---|---|---|
| Solo 401(k) | Up to $23,500 as employee deferral (under 50) + $7,500 catch-up (over 50). Employer contributions up to $68,000 (or $75,500 if over 50). | Traditional IRA or Roth IRA |
| SEP IRA | The lesser of 25% of net earnings from self-employment or $68,000. | Traditional IRA or Roth IRA |
| SIMPLE IRA | Up to $16,000 as employee contribution (under 50) + $3,500 catch-up (over 50). Employer matches up to 3% of net earnings. | Traditional IRA or Roth IRA |
| Traditional IRA | Up to $6,500 (under 50) or $7,500 (over 50), subject to income limits for tax-deductibility. | Solo 401(k), SEP IRA, SIMPLE IRA |
| Roth IRA | Up to $6,500 (under 50) or $7,500 (over 50), with income limits for eligibility. | Solo 401(k), SEP IRA, SIMPLE IRA |
Rules for Opening Multiple Accounts
- Solo 401(k) + Traditional or Roth IRA: You can contribute to both a Solo 401(k) and a Traditional or Roth IRA in the same year. The Solo 401(k) offers higher contribution limits.
- SEP IRA + Traditional or Roth IRA: This combination is also allowed, giving you flexibility in contribution strategies.
- SIMPLE IRA + Traditional or Roth IRA: SIMPLE IRA can be combined with either a Traditional or Roth IRA for added savings.
- Solo 401(k) and SEP IRA should generally not be opened together, as both serve similar purposes.
Business owners have some options that individuals do not have. With some choices, the business can also contribute. Sounds strange because you own an LLC for example so how can you and the LLC contribute? The IRS recognizes the LLC as an entity and you are an entity. Just as a corporation can match the contributions of their employees, real estate agents who “work” for the LLC can have the LLC match their contributions. This permits you to add even more to your retirement account.
If you have rental income from investment properties, for example, assign a portion of that to your retirement plan each month. Supplement your retirement plans with income from each sale of a property from your commission. The good news is that your retirement portfolio will grow with the value of the equities, dividends, equity in your investment property, and rental income.
You have the option of using a certified financial planner to help you create your plan but keep in mind that many do not fully understand real estate investments. With careful planning, before you contact a certified financial planner, you can save money and move the process forward more efficiently.
IRA Contribution Calculator
The calculator above can be used to give some idea of how much you will earn if you make deposits each month. Understanding that deposits will rarely always be the same amount due to the flow of income, use a number approximating your monthly contribution. Check the limits in the tables. The employer contribution is applicable for the type of plan that permits it. 7% is the long-term average return in the stock market after adjusting for inflation. This calculator is not designed to manage income from property sales.
With all of the changes in the Real Estate Industry, it will be more important than ever for you to create a real estate business that is every bit as professional as any corporation. Real estate professionals understand more about the business side of the industry than many people who are starting businesses such as baking. Unlike many retail businesses real estate income does not come on a schedule. To maintain financial stability, you must have an emergency fund which is not the same as a retirement fund.
This brings me to a key point. You may be tempted to tap into your tax-advantaged retirement accounts, but don’t. Those funds are for your retirement. Future you, will appreciate your discipline even when things are tough. There are also consequences such as a tax bill coming due. There is a hefty 10% penalty for removing funds before you are 59 1/2 and then how about income taxes on the withdrawal if it’s from your tax-advantaged retirement accounts?
Start with a business structure
The best retirement plan will include the creation of a business. You are currently a sole proprietor, you do not work for your sponsoring broker. You can remain a sole proprietor but creating a Limited Liability Company may be a better option. Open a business checking account for this new LLC. Deposit all of your income and pay all of your bills through the account. This sets you up as a legitimate business and will help with your personal financial situation.
Next, determine which retirement plan you like based on the selection above. If you consider one of the plans that offers the employer contribution, you can save more in years where net income is larger. The object is to put aside money, as much as you possibly can. Open an account with a brokerage firm that offers the plan you like. Several larger companies work both in brick and mortar and online e.g. Charles Schwab. The brokerage account will permit alternative investments in the stock market. You can buy stocks, mutual funds, bonds, and even invest in real estate investment trusts.
Stock brokerage firms offer investment options
The brokerage firm offers investment options outside of real estate. Your retirement accounts along with income from rental properties a great way to complete a retirement plan. Remember that cash for a rainy day mentioned above. The best place to park that cash is with a money market fund at your broker. You will always want your money working for you and money market funds pay good prevailing interest rates. The best way to understand where you may want to invest your retirement funds is to talk with a financial adviser at the investment brokerage. Your investment strategies will change with age, more conservative as you enter retirement.
Check out our other blog articles such as this one The best business management tips for real estate agents. Real estate agents nearing retirement should read this article
Sign up to become a member of Real Estate Agent Commission and review commissions available for properties you may want to sell. Listing agents, sign up to post commissions you are willing to pay to cooperating brokers.
Leave a Reply