Planning for Retirement: Options for Realtors
It’s easy to see why people decide to pursue a career in real estate. Perks such as being your own boss and having control of your own growth (get out what you put in) is a clear attractor for many. In its 2018 report, the National Association of Realtors reported that there are 1.3 million realtors in the U.S., and increase from 1.22 million reported in 2017.
Ask any realtor, and they will tell you that to reap the immense benefits of this career, one must put in lots of time and hard work. Keeping up with current clients, marketing, maintaining a web presence, and juggling showings all while maintaining a personal and family life doesn’t leave too much time to think about much else. That’s why it’s not too surprising that many realtors do not find the time to plan for their retirement; sifting through the multitude of plan options and finding what suits your individual needs the best. Here, we’ll take a look at some of the top choices for retirement savings options for real estate professionals.
Traditional IRA:
Limit of Contribution: $6,000
One of the most well-known savings tools used by employees and contract professionals is a Traditional IRA plan. As of 2019, individuals can contribute up to $6,000 annually. Plus, if you are age 50 or over, you can contribute an additional $1,000, making your cap $7,000 annually. While a traditional IRA doesn’ t impose income limits on contributions, the IRS does limit the amount you are allowed to deduct on your taxes, depending on possible coverage of a retirement plan at work for you or your spouse.
Roth IRA:
Contribution Limits: $6,000
Roth IRA contributions are subject to income limits. For married couples who file jointly, the income threshold is $193,000-$203,000 for 2019. The income threshold for single filers is $122,000-$137,000. Also, Roth IRA investments are allowed to grow tax-free, and qualified distributions can be withdrawn tax-free as well. Utilizing a Roth IRA can make a great deal of sense for those realtors who are just starting out and may be in a lower income bracket and have more years of tax-free growth on their side.
SIMPLE IRA:
Contribution Limits: $13,000
Designed for small business owners with 100 or fewer employees, the SIMPLE IRA may be an excellent choice for real estate professionals that wish to offer retirement benefits to small teams of employees. As of 2019, employees can annually contribute up to $13,000 of their income. Some of the reasons to choose a SIMPLE IRA include a low cost to operate it, easy maintenance, and a simple set-up process. A downfall, however, is the 25% penalty on any distributions that you may take within two years of first participating in your employer's plan. This is a significant bump higher than the 10% penalty that other plans have.Plan participants who are 50 and older are allowed to contribute an additional $3,000, making their annual contribution limit $16,000.
Solo 401(k):
Contribution Limits: $56,000 + $6,000 catch-up
As it’s constructed for self-employed individuals, a Solo 401(k) retirement plan is made up of two kinds of contributions: an employee profit sharing contribution and an employee salary deferral contribution. The total allowed contribution for a Solo 401(k) in 2019 is $56,000 and for someone aged 50 and over, the limit is $62,000. This plan allows participants to have access
to up to $50,000, or 50% of the account balance by way of a loan. A loan used for buying a primary residence can be paid back over 15 years, while a general loan would need to be paid back over five years. Realtors using this savings tool must be aware of a few things, however. One must be sure to file a form 5500-EZ if the value of their plan exceeds $250,000 and remain careful about transactions that are not allowed (such as what the IRS defines as ‘self-dealing’ or ‘conflict of interest’ transactions). Additionally, a Solo 401(k) would be ineffectual for the small business owner with employees because it does not allow employee inclusion.
Defined Benefit Plan:
Contribution Limits: $225,000
A defined benefit plan is one in which a sponsor or employer guarantees a specific payment, either paid as a lump sum, a pension, or a combination of the two. The sponsor manages investment risk and portfolio management for the plan.
With this particular plan, benefits are determined by utilizing a formula that looks at several factors such as an employee’s length of employment and their salary history. The plan differs from other pensions in that the employee payout depends on the returns from the investments. If the plan is not managed well, there could be poor returns resulting in employers having to access company earnings to make up for shortfalls. One main pitfall of this plan is its relatively high cost compared to others. Also, the intricacies of administering it are more complicated than others.
Summary:
Each of these plans offers some unique benefits. When it comes down to it, you must look at each one and see which will address your particular needs and provide you the best overall benefits. As a real estate professional, you must choose a plan based on its suitability for your financial goals and investment objectives.
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