Are you thinking about saving for retirement but not sure which retirement plan is best for you? What does each plan offer and what factors should you consider to pick the right retirement plan for you?
The choice of a retirement plan will depend on your current situation and your goals. Each retirement plan has its pros and cons and once you are clear on your objectives, the decision will be pretty easy to make.
I recommend that realtors ask the following 5 questions to pick the right retirement plan.
The first factor in determining the type of a retirement account you should pick is your long-term business goal. Are you planning to stay a solo realtor and continue working on your own, or are you planning to build a team and have other agents work for you?
Depending on the answer, you may want to pick a retirement plan that is sponsored by an employer or just an employee retirement plan where everyone invests for themselves.
If you plan to stay solo, you may choose an individual retirement plan (IRA), a SEP-IRA or a Solo 401(k).
If you are planning to grow your team, you need to be aware that the SEP-IRA (that is probably the most popular plan option for realtors) is an employer-sponsored plan -- which means that if you have employees you are required to contribute to their retirement plans in the same proportion of income that you contribute for yourself.
The second important factor is your income level.
There are basically two types of plans. There are the individual retirement accounts - traditional and Roth IRAs, and profit-sharing plans, otherwise known as employer-sponsored plans.
If you have an IRAs or a Roth IRAs, you can only contribute $6,000 a year to a plan or $7,000 if you’re over 50. So, if you're just starting out and you want to start putting money away, you may want to consider a traditional or a Roth IRA.
However, if your income is higher and you want to contribute more than $6,000, you are better off picking something like a SEP IRA or a solo 401k. These plans allow you to put away upwards of $57,000 per year, depending on your income, tax rate, and whether you want to maximize your contributions to save on taxes.
And speaking of taxes, the third most important factor is your tax situation.
As far as taxes go, there are two types of plans. There is a tax-deferred plan, which is your traditional IRAs and your SEP IRAs. With these plans, your contributions now are tax-free but you’ll pay taxes when you retire and start spending the money. At that time, both the contributions and the growth will be taxed at your income tax rate.
And there are, of course, the Roth IRAs where you put away money after tax and it grows tax-free. When you withdraw money from the Roth IRA, you don’t pay any tax.
For most people when they're starting out, their income is lower and their tax rate is lower. So they should consider investing in a Roth IRA and put away money after paying taxes, but get all the tax-free growth when they retire.
Conversely, if your income tax rate is higher, you will probably consider the tax-deferred retirement plans because these plans will help you save on taxes now and minimize your tax bill, which is very beneficial as your income goes up.
The next aspect here is understanding your investment goals.
Rather than just saying “I want to save for retirement", dig a little deeper and consider your financial goals in general.
A few questions you may want to ask yourself are, "Do I want to build wealth?", "How much do I want to have when I retire?"
These questions will help determine the type of investments you should have in your retirement plan. The more wealth you want to build, the earlier and more consistently you should invest. And you should lean more towards stocks and investments that deliver higher return.
A crucial part of this assessment is understanding your knowledge of investing and risk tolerance. Are you an aggressive investor who’s not afraid of market downturns or do you prefer a more conservative approach? The answer will further help you decide what retirement plan is right for you.
Each retirement plan is allowed to invest in certain types of investments, so you will want to look at each plan and consider the types of investments that you are comfortable with and that meet your goals.
One type of IRA which we haven't spoken about before, is called a self-directed IRA. What's special about this particular plan is that, in addition to stocks and bonds, you can invest in real estate tax-free -- which could have huge benefits for a realtor who’s very familiar with the market and is interested in investing in properties to build retirement income.
The fifth and final factor that you want to consider when choosing the right retirement plan, is the amount of paperwork that you're willing to take on to maintain a plan.
Most self-employed small business retirement plans don't require a ton of paperwork, as many IRAs have minimal admin requirements.
However, if you are considering a profit-sharing /401K type plan, you need to be aware that these plans have paperwork and regulatory requirements that need to be met.
If you open a 401k, chances are you will need to have an administrator who will help you set it up, manage it and run all sorts of tests that will make sure that you're not discriminating against any of your employees and ensure that you're staying within the allowable limits and contributions.
The bottom line is that as a self-employed business owner, you’re on your own when it comes to saving for retirement and you should put away as early as you can, as consistently as you can and as much as you can to have enough money to retire. But before you pick a plan, consider these factors to make sure that you have a strategy that will get you to your goals faster and with a higher chance of success.
Hopefully, this guide has helped you understand what factors are important to consider when choosing the right retirement plan for your goals. If you're still not sure where to begin, I'd be more than happy to help you figure it out.