Are you a Realtor and just not quite sure how to get started saving for retirement? Well, here’s how a Roth IRA can jump-start your retirement savings.
As a real estate agent, you typically don’t have a company 401(k) plan built in as a retirement benefit. The upside to that problem is you get to be the one that picks how you want to start building your wealth, especially when it comes to picking the type of retirement account that fits you best.
Roth accounts are an extremely effective tool for saving for retirement. What we’re going to do today is go over three reasons why they can make a ton of sense for jump-starting retirement savings.
Reason number one is tax-free growth. The big difference between a traditional retirement contribution and a Roth retirement contribution comes down to taxes. With a traditional contribution, you’re going to get a deduction on your taxes today. It’s going to grow tax-deferred into the future. And then when you take that money out in retirement, it’s going to be 100% taxable.
Now, contrast that with a Roth contribution. With a Roth IRA or Roth 401(k) contribution, you’re not going to get that deduction up front, so you’re still going to pay taxes today on that money that you earned. And then once it’s inside of that Roth account, it’s going to grow completely tax-free into the future. And then after 59 ½—that’s that magic age for retirement—you get to pull out all of the contribution, plus the growth, tax-free. That’s the magic of a Roth account.
The second reason that Roth accounts are an awesome tax-efficient way to save for retirement is the ability to manage your tax brackets in retirement.
While I’m clearly advocating for Roth contributions as a component to your retirement savings, we would actually argue that a combination of both traditional and Roth contributions could make the most sense. And here’s why. Really, what we’re doing here is just diversifying the types of tax treatments of the assets that we’ll have available in retirement.
So think of yourself in the future. You’re retired. And all of a sudden, we have a big expense come up. It’s time to replace a car, for example. If you have to take out 100% of the cost to cover a new car—and we know those aren’t cheap these days—if you have to take that all out from a traditional retirement account, there’s a good chance that’s going to bump you up into a higher tax bracket than what you’re used to.
Now, if you have both types of retirement savings vehicles available, both traditional and Roth, now we have some planning that we can do around managing the tax brackets that you’re in, in retirement. What our goal would be here is to keep that tax bracket in the nice, easy, same level that you’ve been all the way through and not spike you up into a tax bracket that you’re not used to paying.
So do your future self a favor and be diversified in your retirement savings—have some traditional, have some Roth available. It really can come in handy when you’re in retirement and life happens.
Reason number three is access to contributions prior to 59 1/2. I want to start off by saying compound interest is your biggest friend when it comes to Roth account savings, and the reason for that is that tax-free growth. The longer that those dollars are inside of the Roth account, the more time you have to take advantage of the tax-free growth that happens inside of that account.
That being said, an extra benefit that’s available specifically to the Roth IRA—not a Roth 401(k), so keep that in mind—is the ability to access contributions at any time.
If you put in a $6,000 contribution, let’s say it grows to $7,000, you have access to take out that $6,000. But you can’t access that $1,000 of growth without penalties and taxes.
Again, it can act as a pseudo backup emergency fund, which is just an added flexibility that’s not available with a traditional retirement account. But the best thing that we can do is to really leave those in there for the long run and take full advantage of that tax-free growth.
There you have it. That’s three reasons Realtors should strongly consider incorporating Roth contributions as part of their retirement savings plan.
Now, when it comes to setting up Roth accounts, there’s a handful of things you really have to pay attention to—a contribution limit, selecting the type of the account, IRA versus 401(k), all of those types of things.
If you’re a Realtor and you have questions about how much Roth you maybe should be doing, or what type of account, do you make too much when you’re contributing to a Roth, all that type of stuff, feel free to reach out. We would love to have a conversation with you and make a plan for the best way for you to maximize your retirement savings tax efficiently.
Schedule a complimentary insight meeting to discuss your situation and how we may be able to help.