Realtors have many options when planning for retirement. While some realtors have company-sponsored retirement plans, many realtors are self-employed. The majority of real estate agents are 1099 independent contractors. This article will explore the best retirement accounts for realtors to help decide what type of plan is best for your real estate career. Understanding these options will help you choose the best plan tailored to your personal circumstances and financial goals.
Key Takeaways
- A Solo 401(k) is the best all-around option for most self-employed realtors, offering high contribution limits, Roth features, and real estate investing flexibility.
- SEP IRAs are easy to set up and a good choice for realtors who want a simple, high-limit retirement plan without employee deferrals.
- Cash Balance Plans are ideal for high-earning realtors who want to contribute over $100,000 per year and maximize tax savings.
Introduction to Retirement Planning
As a real estate agent, planning for retirement is crucial to ensure a secure financial future. Retirement planning involves creating a strategy to save and invest for the future, taking into account income, expenses, and financial goals. A well-planned retirement strategy can help real estate agents achieve their desired lifestyle and provide financial security during their golden years.
It’s essential to consider factors such as taxable income, cash flow dynamics, and tax implications when choosing a retirement plan. Real estate agents can benefit from consulting a financial planner to create a personalized retirement plan, which may include a combination of retirement accounts, such as a SEP IRA, Solo 401(k), and regular IRAs.
Best Retirement Accounts for Realtors
There are several types of retirement accounts available to real estate agents, each with its own advantages and disadvantages. These include traditional and Roth IRAs, SEP IRAs, Solo 401(k)s, and Cash Balance Plans. Traditional IRAs offer tax-deductible contributions, while Roth IRAs provide tax-free growth and withdrawals.
SEP IRAs and Solo 401(k)s are designed for self-employed individuals and offer high contribution limits, making them suitable for real estate agents with higher incomes.
Cash Balance Plans, on the other hand, offer significant tax savings and are ideal for real estate agents who have achieved substantial success in their careers. Real estate agents can also consider alternative investments, such as real estate investments, to diversify their retirement portfolio.
Self-Employed Benefits for Realtors
A vast majority of realtors are self-employed. Accordingly, a self-employed real estate professional who operates his or her own business will receive a 1099 with the commissions earned from the real estate agency. Small business owners, including realtors, can benefit significantly from retirement plans tailored to their needs.
There are many ways a realtor can be self-employed. They can be a sole proprietor, or can establish an entity, such as an LLC, C, or S corporation. The great news is that it is now better than ever to be self-employed. Not only do you have the ability to control your work/life balance, and obtain health insurance, but you also have the opportunity to supercharge your retirement savings.
SEP IRA for Realtors
A Simplified Employee Pension IRA (SEP IRA) has traditionally been the most popular retirement plan for the self-employed and small business owner. A SEP IRA is a pure profit-sharing plan that allows the employer to make up to a 25% (20% in the case of a sole proprietorship or single member LLC) profit-sharing contribution to all eligible employees up to a maximum of $70,000 for 2025, which is a $1,000 increase from 2024. A SEP IRA does not include a catch-up contribution option when you reach age 50, which is a drawback compared to the Solo 401(k). A SEP IRA is a pure profit-sharing plan which means there are no employee deferrals. So, if you earn $100,000, the most you can put away in your SEP is $25,000.
One can set up a SEP IRA up until the business files its income tax return. Contributions must be made by the tax return deadline (including extensions). Beginning in 2023, SEP IRA contributions can be made in pretax Roth.
A Roth SEP IRA allows employer contributions to be made on an after-tax basis, meaning the funds grow tax-free and qualified withdrawals in retirement are also without tax. While traditional SEP IRAs are funded with pretax dollars, the Roth SEP—made possible under the SECURE 2.0 Act—gives business owners and employees the option to pay taxes upfront for potential long-term tax-free growth.
Traditional IRA contributions are also an option for individuals who exceed the income limits for a Roth IRA, offering tax deductions for contributions made within the year. The SEP IRA is a great retirement and investment plan for a self-employed realtor.
Solo 401(k) for Realtors
The Solo 401(k) plan, also known as an Individual 401(k), has surpassed the SEP IRA as the most popular retirement plan for the self-employed. It is an IRS-approved retirement plan which is suited for business owners who do not have any employees, other than him or herself and their spouses. A Solo 401(k) plan is basically a regular 401(k) plan covering only one employee. The most popular feature of the Solo 401(k) plan is the ability to make high annual contributions. Required minimum distributions (RMDs) are mandated once the account holder reaches age 73.
In 2025, a Solo 401(k) plan participant under the age of 50 can make a maximum annual employee deferral contribution in the amount of $23,500. That amount can be made in pretax, after-tax, or Roth. On the profit-sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) annual profit-sharing contribution based on the amount of the net Schedule C amount or W-2, as applicable, up to a combined maximum, including the employee deferral, of $70,000 for 2024.
Plan participants at least age 50 can make an additional catch-up contribution of up to $7,500 as the employee increasingly the limits to $31,000 and $77,500 respectively. Plus, beginning in 2025, those between the ages of 60 and 63 can take advantage of the “super” catch-up. Instead of $7,500, those individuals can increase their annual contribution by $11,250.
Solo 401(k) plans offer more control over investment choices, including the ability to invest in assets like real estate, cryptos, private placements, and more. Additionally, participants can begin taking distributions without penalties starting at age 59 1/2.
Related: Solo 401(k) or SEP IRA for Real Estate Investors?
SEP IRA vs. Solo 401(k): What’s Better for Realtors?
The SEP IRA is known for its ease of use. It’s ideal for realtors who want a straightforward way to save for retirement with minimal paperwork. You can contribute up to 25% of your net earnings from self-employment, up to a maximum. However, only the employer (you, as the business owner) can contribute—there are no catch-up contributions. It is best for realtors with fluctuating income who prefer a simple, low-maintenance retirement plan.
The Solo 401(k) is designed for self-employed individuals with no full-time employees other than a spouse. Unlike the SEP IRA, the Solo 401(k) lets you contribute both as the employee and employer. It also allows Roth contributions, and you can even borrow from your plan—something SEP IRAs don’t allow. This is a good option for realtors who want to contribute more, take advantage of Roth savings, or access their retirement funds via loans.
Investing in a Solo 401(k) plan also provides the flexibility to diversify your portfolio beyond traditional assets.
Bonus for Realtors: Real estate investors using retirement funds must use non-recourse loans when financing property purchases. While IRAs are subject to the Unrelated Business Taxable Income (UBTI) tax when using borrowed funds, 401(k) plans are generally exempt from this tax.
If you want maximum contributions and more control over your retirement savings, the Solo 401(k) is often the better choice. But if you’re looking for a low-effort, tax-deferred plan with high contribution limits, a SEP IRA may be a better fit.
Tax Implications
The tax implications of retirement plans are a critical consideration for real estate agents. Contributions to a retirement account can reduce taxable income, which can lower tax liability. The tax system operates on Marginal Income Tax Brackets, which determine the tax benefit of retirement contributions. Real estate agents can determine the tax benefit by multiplying the dollar amount contributed to their retirement plan by the marginal rate of the bracket.
For example, if a real estate agent contributes $10,000 to a Traditional IRA and is in the 24% tax bracket, they can save $2,400 in taxes. It’s essential to consider the tax implications of each retirement plan and choose the one that maximizes tax savings. Real estate agents can also consider consulting a tax professional to ensure they are taking advantage of all available tax deductions and credits.
Defined Benefit Plan/Cash Balance Plan
For realtors who expect to have consistent annual earnings above $150,000 for the next several years and are looking to put away over $100,000+ a year in a retirement plan, the defined benefit/cash balance plan is your answer.
A cash balance plan, a type of defined benefit pension plan, promises an employee an employer contribution equal to a percent of each year’s earnings and a rate of return on that contribution. Defined benefit plans guarantee a specific benefit at retirement to each eligible employee. In general, defined benefit plan benefits are funded over the working life of the participating employee with annual tax-deductible contributions from the employer. The employee does not make any contributions to the plan. Instead, the employer makes all contributions based on predetermined retirement benefits as outlined in the pension plan document. Based on certain complex calculations by an actuary, a defined benefit/cash balance plan can provide enormous tax benefits and retirement savings to self-employed realtors.
Conclusion
So, what is the best retirement account for realtors? For most realtors, the Solo 401(k) plan offers the greatest retirement and tax saving benefits. In addition, a Solo 401(K) plan can also contain a self-directed option allowing one to use his or her plan funds to invest in real estate as well as other traditional and alternative assets. For any realtor who expects consistent earnings above $150,000 for several years and wishes to maximize their retirement and tax advantages, the defined benefit/cash balance plan is a great option.
Retirement funds can be utilized in various investment strategies, providing significant tax-deferred income generation through real estate investments.
