Top-producing real estate agents typically do not have the luxury of having a built-in company 401(k) plan like their peers in the corporate world.
As small business owners, real estate agents must save at an even greater rate to achieve financial success, as they don’t have any built-in matching or profit sharing in their retirement plan that would come from an employer.
Faced with this dilemma, what tools do you have to reach your retirement goals?
Fortunately, a couple of highly efficient small business retirement plans are available to implement and can give you the vehicle you need to be on track for a successful financial plan.
The SEP IRA
The “SEP” in SEP IRA stands for “Simplified Employee Pension”—but don’t get hung up on the name.
At its core, a SEP IRA is the simplest retirement-savings vehicle for a real estate agent’s business to implement.
Account setup: SEP IRAs are extremely easy to set up and can be established at your favorite investment custodian (TD Ameritrade, Charles Schwab, or Vanguard are a few good examples). Not to mention, there is typically no cost to establish your SEP IRA.
Contribution limits: The maximum contribution to a SEP IRA is $61,000 for 2022. That said, your income level and business structure will determine if you can contribute up to the $61,000 limit.
Sole proprietors and LLCs are limited to 20% of their Schedule C net income for their contribution.
Meanwhile, if your real estate business is structured as an S corporation, the limitation is 25% of your W-2 income. Remember, your S corp dividend income doesn’t count!
Contribution deadlines: Flexibility in timing your contributions is an area where SEP IRAs shine. Post-year funding is available all the way up until your tax return is filed. So, if you’re looking for a big tax deduction after a year you crushed it in your business, consider making a SEP contribution.
Types of contributions: Here is a drawback for SEPs. Contribution types are limited to traditional contributions only. This means that you will get a deduction on your taxes for every dollar you put into the retirement plan, but the downside is that Roth contributions are not available.
The Solo 401(k) Plan
As the name implies, the Solo 401(k) is a retirement plan designed for a self-employed individual or a sole owner-employee of a corporation.
While slightly more complex, the Solo 401(k) has some bells and whistles the SEP IRA does not.
Account setup: Solo 401(k) plans are easy to set up by 401(k) standards, but they do require a Plan and Trust document to be drafted and implemented, which adds some cost to set up the plan. Additional forms typically are not necessary until the plan assets breach $250,000. That said, we recommend partnering with a plan consultant to make sure your i’s are dotted and t’s are crossed.
Contribution limits: The maximum contribution to a Solo 401(k) is $61,000 for 2022—the same as a SEP IRA.
The second requirement for contributing to a Solo 401(k) is based on your income level. Since Solo 401(k) plans permit both employee and employer contributions, this is an area that allows for much more flexibility than with the SEP IRA.
Contribution deadlines: Solo 401(k) plans must be established in the year for which you are making contributions. Also, employee contributions must be made in the tax year. This requirement is more stringent than the SEP IRA’s rules.
Types of contributions: Did someone say Roth contributions!? A huge upside to the Solo 401(k) is the ability to select Roth tax treatment on a portion of your contributions. This means you can forgo the tax deduction now, but those dollars grow tax-free for retirement.
The Most Important Thing
Is there an optimal retirement account for each Top Producer’s unique situation? Absolutely.
If fact, I would recommend consulting with your financial planner and CPA to ensure you understand all the pros and cons.
But regardless of the vehicle you select, the most important thing is this: Don’t let your success in your business stop with your business.
Take action today by saving for your retirement now, because as a small business owner, no one else is going to do it for you.
Schedule a complimentary insight meeting to discuss your situation and how we may be able to help.