Self-Directed IRAs (SDIRAs) come with a lot of benefits, if you follow the rules and conduct due diligence on your investments. Real estate professionals are well-poised to take advantage of these benefits. Their real estate knowledge, experience, and access to good deals can be leveraged to reap the benefits of SDIRAs. But most aren’t taking advantage of the opportunity to build retirement wealth and grow their business at the same time.
In a recent poll, we learned that many real estate agents have retirement savings of some sort, but not many have self-directed IRAs. Many also count on selling their business to retire. Others save and invest in real estate, but pay taxes on gains from their investments because these investments are not in a tax-deferred account. Many have traditional IRAs, but they are not taking advantage of the high contributions that are allowed in Simplified Employee Pension (SEP) IRAs.
The National Association of REALTORS does not offer a retirement package and neither do most brokers or associations. Real estate agents are self-employed so it's up to them to set up a retirement plan. But who has time to think about retirement right now? Although we are all going through unprecedented times today, we should not neglect the future. At some point all this will be over, and we will need to face the future. It’s best to prepare now.
A Note on Self-Directed IRAs
Self-directed IRAs allow the opportunity to take advantage of alternative investments such as real estate, private equity, precious metals, and other types of investments typically not allowed at most financial institutions. Most institutions offer investments in stocks, bonds, and mutual funds for the most part. In order to invest in alternative assets, like real estate, you need an IRA custodian that focuses on these investments. A company like IRAR Trust specializes in alternative investments, like real estate, in IRAs.
Here are some reasons why, if you’re a real estate agent, you should open a self-directed IRA, and start building retirement wealth while growing your business at the same time. If you are not a real estate agent, you probably know one or have worked with one. Forward this valuable information to them. They will thank you.
Top 5 Reasons Every Real Estate Agent Should Have an SDIRA
1. Invest in An Asset Class You Know Very, Very Well
You are already in the real estate industry. You have the real estate education. You know the market, the process, the people. You know how it’s done, backwards and forwards. So what’s stopping you from using those skills to plan for your own future? You may already be investing in real estate. Why not do it in a tax-advantaged environment? You learn about deals through your work and existing network and may already be doing this outside of a retirement plan. But you can do it inside of one, too. You’ve got a lot of possibilities.
If you do not have an IRA, you can start saving now. You don’t have to invest right away. You can build your cash account until you are ready. You can also move funds from an old 401(k) or another retirement plan you may have to establish your self-directed IRA.
There are several ways for a self-directed IRA to purchase real estate. You don't need to have the full purchase amount in your IRA to buy property. Your IRA can get a loan or partner with others, including yourself on new purchases. You have many options. The important thing is that you need to start saving now.
2. Rental Income Isn’t Taxed Until Distributed
One major (and often overlooked) benefit of self-directed IRAs is rental income isn’t taxed while it’s in your IRA. You don’t have to pay taxes on the earnings until distributed (tax-deferred) or at all, if you have a Roth IRA. You can use the money you would have been paying in taxes to maintain or grow your real estate retirement empire.
Although you can continue to make investments in the IRA with the earnings, you cannot use it personally. This means that all income must go back into the IRA so that it is not taxed. Follow the rules to keep your IRA compliant. Learn more about prohibited transactions.
3. Save for Retirement Without an Employer-Sponsored Plan
If you are self-employed, you may not have access to a 401(k) or employer-sponsored plan to save for retirement. But you can establish a self-directed IRA anytime. As a small business owner, you can open a SEP and put away more than an individual investor. SEP allows you to contribute up to 25% of your income and up to a certain limit depending on the tax year. For example, in 2019 a SEP owner could contribute up to $56,000 for the year. Your business can deduct your contributions to employee SEP accounts (this means you).
4. Build a Guaranteed Income Stream You Can Rely On
No one likes the thought of running out of money in retirement, but with costs rising every year it’s hard not to be worried. When investing in real estate (inside or outside of your IRA), you have predictable rental income every month— essentially a guaranteed monthly stipend. It’s a nice way to protect yourself from the unpredictability of life (and the stock market), while preparing yourself for the future.
5. Offer Unique Insights While Growing Your Network
Real estate professionals aren’t the only ones investing in real estate— so are their clients, and recently, more and more are doing so with their self-directed IRAs. They are directly involved with buyers and sellers but are not tapping into this incredible opportunity to build more business.
Lead by example. If you know about self-directed IRAs, and better yet, you intimately know the process from an investors’ perspective, your insight will be appreciated and highly regarded. You can use this new insight to build your network and client base.
In a Nutshell
Self-directed IRAs enable massive gains and more freedom to invest the way you want. But they’re not the retirement account for everyone. You hear the same refrain whenever you ask, but the answer really depends on your goals and strategy. Put that real estate license to work. As a real estate professional, you are uniquely poised to benefit from the opportunity to invest your retirement in physical property— an asset class you already understand.
If self-directed IRAs sound like the answer your retirement has been waiting for, then wait no more. You can establish a Self-Directed SEP IRA through the new tax filing deadline of July 15th, 2020 (or up to October 15th, 2020 if you file an extension) for the 2019 tax year. Give us a call. We’re here to help with any questions you may have about the process.