Whether you’re a member of a power real estate team doing millions of dollars in closings per year or an individual working part time and close maybe five or six deals a year, you have the same problem: reducing your 1099 earnings so to pay the smallest amount of taxes. While there are many write-offs you probably use which pertain to doing your job, maybe one of the largest single deductions you could take advantage of is a contribution to your own retirement plan. I will cover some of the more popular plans that can be utilized by realtors in order of the amount of allowable annual contribution.
First and most basic is the Traditional IRA. You may contribute up to $5,500 in 2017 ($6,500 if you are 50 or over). Once the IRA is funded, it may be invested in any number of investments for growth or income. Growth inside the IRA is not taxable and distributions after reaching age 59 ½ are fully taxable. It doesn’t make a difference which agency you work for, the IRA is yours and can be funded by you regardless of where you hang your shingle.
Next, because you’re most likely a Schedule C filer (sole proprietor), you are considered both the employer and employee and may contribute up to $12,500 to a SIMPLE IRA, plus an additional $3,000 if you’re over 50. The same portability rules apply to SIMPLE’s as Traditional IRA’s.
If you have set up an S-Corp or LLC to do your real estate business, you may set up a SEP-IRA or Solo 401(k) plan. These plans are funded by the employer (you) for the benefit of your employee (you). Contributions are tax deductible to your business entity (which also reduces your pass through income), and are considerably higher than the Traditional and SIMPLE IRAs. Contributions are limited to the lessor of 25 percent of your net self-employment income or $54,000 in 2017.
If you are in the 33 percent federal tax bracket, the maximum contribution could save you over $22,000 in federal and state income taxes- as well as significantly building or adding to a retirement nest egg.
And finally, for the maximum deduction for very high earners, you may set up a Defined Benefit Plan. The plans mentioned earlier are known as Defined Contribution Plans- which identify and limit the amount of contributions each year. In contrast, a Defined Benefit Plan first identifies the amount of benefit required at retirement (up to a maximum of $215,000 per year in 2017), and then works backwards to calculate the amount of annual contribution needed to fund that amount.
An actuarial is needed for this, but in general, the closer one is to retirement, and the higher required income, the greater the amount of contribution allowed. For example, a 59 year old person earning $300,000 in self-employment income may contribute up to $218,200 in a defined benefit plan. Once retired, the plan assets can be rolled over to an IRA and continue to grow tax-deferred.
If one of these plans makes sense to your unique financial situation, give me a call or call your financial advisor for more specifics, requirements and limitations on any of these tax-saving retirement vehicles.
Provided by Ed Wettig, CFP, Wettig Capital Management which offers investment management, financial planning and retirement income strategies. Securities, insurance and investment advisory services offered through Royal Alliance Associates, Inc. Member FINRA/SIPC. Wettig Capital Management is a marketing designation.
