It might seem difficult to save for retirement as a real estate agent when you’re not sure what your income will be from month to month, or when you don’t have an employer-sponsored 401(k). That doesn’t mean it’s impossible, however. Preparing for retirement is something you can and should be doing at each stage of your career.
Here are some retirement saving strategies that you can review and implement into your personal financial plan.
1. Roth IRA
A Roth IRA is an investment strategy you might want to try earlier in your career when you are earning less. That’s because a Roth IRA is funded with post-tax income, meaning you can’t use Roth IRA contributions toward a deduction on your income taxes. If you are earning money at a lower tax threshold and aren’t relying on many deductions to help make your financial strategy work, then a Roth IRA might be a good strategy.
Since you’ve already paid tax on the money that goes into a Roth IRA when you pull the funds out they aren’t taxed.
Roth IRAs have income restrictions. In 2021, single tax filers had to earn less than $125,000 to contribute to a Roth IRA.
2. Traditional IRA
If your income is above the limit for a Roth IRA, you can consider a Traditional IRA. There are no income limits for a Traditional IRA. A Traditional IRA can help you reduce your present-day tax bill because deductions are taken in the year they’re made. There are exceptions to this — if you or your spouse is contributing to an employer-sponsored retirement plan you might not be eligible to deduct Traditional IRA contributions. You can view a table with income limits and detailed information about deductions here.
Also, if you haven’t purchased a house yet, you can use up to $10,000 of your Traditional IRA toward the purchase of your first home. You can also use funds from your Traditional IRA to pay for qualified college expenses.
Remember, if you withdraw money early for reasons that are not exempt you’ll face a 10% penalty. You must be 59.5 years old before you can start withdrawing without penalty. At 70.5 years old you must begin taking distributions from your fund.
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3. Solo 401(k)
Just because you don’t have an employer doesn’t mean you can’t fund a 401(k). You could decide to begin funding a solo 401(k), which you can only do if you’re self-employed with no employees. That means if you’re a broker with employees, this likely wouldn’t be the right option for you.
Contributions to a Traditional 401(k) are pre-tax, which means they reduce your annual taxable income. However, when it’s time for the funds to be distributed they are counted as taxable income. Contributions to a Roth 401(k) are made after tax, which means they aren’t taxed when they’re distributed.
With a 401(k) your contribution limit, as of 2019, is $56,000. This amount is split between your contributions as the “employee” and the “employer.”
If your spouse earns income from your business, you can also include them in your Solo 401(k).
4. SEP IRA
The SEP IRA is best for self-employed people with no or few employees. You can deduct whichever is less — 25% of your net self-employment earnings or your contributions. As an employer, whatever percentage you contribute for one employee, you must do for all. You count as an employee, so if you contribute 25% for yourself, you must do it for everyone.
Which retirement strategy is best for you?
If you don’t already have a financial planner, now might be the best time to start looking for one. Choosing a retirement savings strategy depends on your personal goals for when you want to retire and what kind of a lifestyle you believe you’ll lead in retirement.
A financial planner can help you understand the details of each option available to you and help you paint the appropriate picture for what you want your life to look like down the road.
No matter what point you’re at in your career, it’s not too early or too late to make retirement plans.
Should you invest in real estate instead of a retirement plan?
You might have a lot of faith in your ability to earn money in the housing market, which could tempt you to gamble your savings in real estate instead of investing in your retirement. Most financial planners will tell you it’s smart to diversify your investments so that if one area or market dips you’re not completely exposed. That means: don’t necessarily choose between real estate investments or a retirement plan but find a way to make both work for you.
What you invest in will also have a lot to do with how risky you’re willing to be with your funds. If you consider yourself to be more risk-averse, playing it safe might suit you better.
At the end of the day, how and where you choose to invest your money is a function of your financial values, personality, and lifestyle.