Real estate agents love their job so much that they hardly ever think of retiring. However, the day will come that they will bid working life farewell and enjoy life at a (slightly) slower pace.
As you may already know, there are many ways to plan for retirement. Certainly paying off the mortgage of your own home is a big one. So is insuring yourself against adverse events in life. In this post, however, we will zoom in on the different retirement savings accounts that have become the staple of retirement planning over the years.
Here are five savings plans that real estate agents should look into when planning for their retirement:
The good old traditional IRA is available for anybody who has an income. There is never an employer match and the maximum contribution limit is $5,500. When you turn 50 you can start making extra payments every year (this is called the annual ‘catch-up’). With the traditional IRA that catch-up can amount to $1,000.
The Roth IRA is similar in many ways to the traditional IRA. Again the maximum annual contribution amounts to $5,500. There is also the $1,000 catch-up.
At this point you may be wondering what the difference between the Roth and traditional IRA are. One difference is the Roth IRA has income limits. For single filers in 2016 that threshold starts at $117,000 and ends at $132,000 (we are talking MAGI – Modified Adjusted Gross Income). In that range, your contribution is gradually reduced, or phased out, eventually reaching zero. Another difference between them is the timing of when you get a tax break or pay taxes on the original income earned: with the traditional IRA the contributions are tax-deductible when you earn the original income as a self-employed agent but any deductible contributions and earnings you withdraw or that are distributed from your traditional IRA are taxable; with the Roth IRA you can not deduct any contributions up front on your taxes, but all withdrawals are tax-free once you reach the required age.
The Solo 401(k) is accessible for sole proprietors of small businesses and their spouses. Contributions are capped at 25% of profits plus $18,000 — that amount can never go higher than $53,000. With the Solo 401(k), there is no employer matching. Catching up can happen with big leaps, however, with up to $6,000 in catch-up contributions possible. That’s a great feature if you are running behind on building your nest egg or didn’t have enough cash coming in at the beginning of the year. As with a traditional 401(k), your contributions are pre-tax, and you are later taxed on withdrawals in your retirement.
Small business employers and their employees can contribute to a Simple IRA. The maximum annual contribution amounts to $12,500. Employers match 1% to 3% of total pay or contribute a fixed 2% employer contribution to all employees. Catch-up is capped at $3,000 but it is possible to continue to make contributions after age 70½. Growth is tax-deferred and matching contributions can be deducted by the employer as a business expense.
The SEP-IRA, like the Simple IRA, is available to small-business employers and employees. Contributions are limited to 25% of salary with $53,000 being the absolute maximum contribution allowed. All contributions are made by the employer. Caveat: you cannot contribute a higher percentage for yourself than you do for your employee(s). While there is no room for catch-up payments, contributions are permitted after age 70 ½. The contributions and any capital growth are tax-deferred so you will end up being taxed upon withdrawing funds. You can start taking money out at age 59½, but you don’t have to do so until age 70½.
Now that you have five solid options for your retirement, the rest will be up to you. The right choice for you will depend, among other things, on whether you want to pay tax up front or at the time of withdrawal, as well as how much you want to be able to contribute every year. And don’t forget to factor in the retirement savings strategy of your spouse.
Do you have any sure-fire tips for helping agents save for retirement? Feel free to share your experiences in a comment on this post, on Facebook or on Twitter.
[NOTE: Our list of available options should not be construed as investment advice. Please always consult with a trusted financial advisor before deciding what retirement strategy is suitable for you.]