When you are in sales, you typically are subject to a combination of salary and commission or possibly straight commission.  Depending on your compensation structure, it can dictate how you save for retirement.  Let’s take a look at how most real estate agents are compensated.  They are typically paid commissions and receive a 1099-MISC, which means they are self-employed and not an employee.  It is possible you could be considered an employee, but typically not in this industry.  If you get paid this way, you are typically responsible for paying your own taxes.  You typically don’t have any kind of benefits either.   One of the things you should be considering is how to save for your retirement.  Let’s look at a few options you have as a real estate agent.

The first option you could consider would be a traditional or Roth IRA.  You can contribute up to $6,500 in 2023 or $7,500 if you’re over 50 years of age.  If you choose a traditional IRA, you will receive a tax deduction when you file your taxes based on your tax bracket against the amount of the contribution you made.  If you choose a Roth IRA, you do not receive a tax deduction because taxes have already been paid on the money going into this type of IRA.  The benefits of both IRA’s is they grow tax deferred.  With the traditional IRA, you pay taxes later down the road when you start using the funds in retirement after the age of 59 ½.  With the Roth IRA, when you start withdrawing the funds after 59 ½ and you have met the 5 year holding period, your withdrawals are not taxed even on the growth over the years.  As a real estate agent you can take advantage of either one of these plans as long as you have earned income up to the amount you contribute.  As far as how you invest the funds, you can choose something like a target date mutual fund which uses the year you plan on retiring and invests the money in a mix of stocks and bonds accordingly to your time frame until retirement.  I tend to like these types of funds because they automatically get more conservative as you get closer to your target retirement date.  You don’t have to think about when you should reallocate.  You can also choose a wide variety of other options as well, whether it be an allocation mutual fund that is a specific mix of stocks and bonds that doesn’t reallocate automatically, or maybe you want to buy some individual stocks or an ETF of the S&P 500.  You have a ton of flexibility with these plans.  You should consult with your advisor on how to invest according to your own risk tolerance and objectives.

The next option you could consider if you wanted to save more than the IRA max limits is called a SEP IRA.  A SEP IRA stands for Self Employed Pension.   You contribute your money before taxes and receive a tax deduction similar to the traditional IRA.  You can even invest your money the same as you would the traditional IRA.  The difference is that in this plan, the employer makes all of the contributions. If you are self-employed, then you are the employer.  You can contribute up to $66,000 in 2023 or up to 25% of the business earnings or your compensation whichever is less.  If you made $100,000, you could contribute up to $25,000 into this plan, much more than a traditional IRA.  These are the easiest plans to establish if you do not have any employees and want to contribute more than the regular IRA limits.  If for some reason you were to hire employees, you must remember that whatever percentage you contribute to the plan for yourself, you must contribute that same percentage of compensation for your employees.  That’s why this plan is typically best for those that do not have employees or maybe they hire family members as employees.

Another option you could consider especially if you are wanting to make a larger contribution to a Roth type plan would be a solo 401k or a Roth Solo 401k.  A SEP IRA is probably more advantageous if you are looking at a traditional solo 401k because SEP has hired limits, an extended deadline to make your contributes, and does not require any kind of reporting.  The solo 401k requires a form 5500-EZ to be filed each year and the contribution limit is $22,500 in 2023 with a catch up of $7,500 if you are over 50.  If you like the Roth option and want to contribute more than the regular limits, then this may be the best option for you.  Now your contributions will go in after tax, and when you retire after 59 ½ your withdrawals are tax free. Another reason to consider doing a Roth solo 401k instead of a regular Roth IRA, if you or your household have more than $228,000 in modified adjusted gross income, you cannot make that contribution.  That does not apply to the Roth solo 401k.  If you’re a very successful real estate agent, that would be your only option to get a Roth type contribution to a retirement plan.  Also, remember, if you hire employees the solo 401k becomes more complicated.  Again, this is best for self employed individuals with no employees.

There are more options available in addition to the accounts outlined above. It just depends on what your goals are for your money.  Maybe you’ve had a really good year as a real estate agent and you want to put an even larger amount to work.   There are other vehicles that allow for your earnings to be tax deferred and grow over time.  You could also put that extra money into a regular brokerage account and invest it similar to how your retirement account is invested.  You should talk to your advisor to develop a strategy that best fits your needs.  Additionally, please consult with your tax advisor before making a decision on a retirement plan to make sure you are choosing one that best fits your situation.