A Tax-Advantaged Retirement Solution for Real Estate Agents

26th May 2021

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As third party administrators (TPAs), we have seen the ups and downs of many of our clients’ industries depending on the market cycles. One industry that’s weathered the pandemic storm is residential real estate. Real estate analysts have said COVID-19 – and the ensuing work-from-home lifestyle – helped ignite the boom of the real estate housing market. House-bidding competitiveness has reached new heights. For instance in the Bay Area, it’s become standard to pay more than $1 million over the asking price.

Higher home prices and a surge in sales mean increased income for real estate agents. These agents, who are generally self-employed, may be good candidates for tax solutions that can help shelter their money from high taxes. Because of their self-employment status, real estate agents don’t have an employee-sponsored retirement plan – or any retirement plan. For many realtors, their intention is to sell their real estate business and use those funds as retirement income.

Defined Benefit Plans Provide Large Tax-Deductible Contributions

One retirement plan that high-earning real estate agents may consider is a Defined Benefit plan. This type of pension plan provides large tax-deductible contributions averaging more than $100,000. Also the contribution limits for these plans in 2020 is $230,000.  Defined Benefit plans are advantageous for experienced high-income earners, since retirement savings are designed to accelerate and accrue within a shorter time – typically 5-10 years. A small business owner can receive a relatively high percentage of benefits in a one-owner company with a few employees, making this an ideal solution for longtime realtors.

Real Estate Agent Saves $80,000 in Taxes

One of our clients is a 52-year-old real estate agent who grosses $500,000 in his S Corp. He pays himself $150,000 as a W-2 employee. His S Corp is then allowed to put away $218,300 for him in a Defined Benefit plan and it is used as a tax deduction. The agent receives a tax savings of $80,000 and a potential accumulation of $1.8 million into the Defined Benefit plan over its lifetime.

If you’re interested in saving on taxes and building your retirement, see how much you can contribute and save with our Defined Benefit plan calculator.

 

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