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Why is the Solo 401K the Best Asset Management Tool for Real Estate Agents? (Updated Mar. 2023) Thumbnail

Why is the Solo 401K the Best Asset Management Tool for Real Estate Agents? (Updated Mar. 2023)

Retirement Funding Insights

Why is the Solo 401K the Best Asset Management Tool for Real Estate Agents?

Topics: Solo 401K, Asset Diversification, 401K vs SEP, Real Estate “Professional” designation

Did you know you can save up to $66,000 before taxes in a 401K this year? Not just Realtors, but the same rules apply to all Independent Contractor/Self-Employed sole practitioners. While today’s writing focuses on the Solo 401K as an effective Asset Management tool for Real Estate agents, if you are or might become self-employed keep reading! This is also for Real Estate investors who might benefit from the Real Estate Professional designation.

I’ve previously written about how small business owners and entrepreneurs can benefit from and should implement a Retirement Plan, (Why Should a Small Business Owner Have a 401K Plan and What Are the Best Savings Options?), but I wanted to dive deeper into the benefits of a Solo 401K and why Real Estate agents in particular can benefit. Before we continue:

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On a personal note

I once was a realtor, in the great city of New Orleans about 15 years ago. It was a good employment option as I needed a little flexibility around a school schedule. Not to mention the AMAZING Real Estate in the city! I was all about the cool pens and calendar magnets but liking Real Estate from an investment perspective didn’t necessarily translate into being a good realtor, and I left for an opportunity with a steady paycheck. I’m once again an entrepreneur, and I’m also actively pursuing Real Estate investment opportunities – just not with an agent’s license!

Why is a Solo 401K a good fit for a Realtor?

Since most Real Estate agents are considered Independent Contractors and many work by themselves or perhaps have some part-time help (or an involved spouse), I wanted to provide some insight on how this group can both maximize retirement savings and reduce taxes in a meaningful way. In Real Estate, for high-earners or in a big commission year, a Realtor less than 50 years old could set aside $66,000 and reduce his or her taxes by that amount. If you’re over 50, you’re eligible for a $7,500 catchup (or $73,500 total)!

The program offers flexibility as well, as there’s no requirement to contribute. The underlying assumptions to setting up such a plan and contributing are that the Real Estate agent/broker is 1) An Independent Contractor/Self-Employed and 2) Has no other employee (besides a spouse) that works more than 1,000 hours a year (that’s just 4 hours a day, 5 days a week, 50 weeks out of the year). A spouse employed in the business is not subject to the 1,000-hour limit and can make similar contributions.

Have a full-time assistant?

For a Realtor that needs a full-time assistant or a Top Producer that has assembled a team, the Solo 401K won’t work, but a traditional 401K can still be utilized to maximize your pre-tax savings potential. You can still reach similar contribution limits, but other factors must be considered, including contributions to your employees.

How do I save $66,000?

Under any 401K plan, any EMPLOYEE can personally save (called an elective deferral) up to $22,500 in 2023. Furthermore, the EMPLOYER can provide a non-elective contribution to the employee’s account of 25% of employee income up to $43,500, or a combined total of $66,000 for the individual that is both employee and employer. Again the $7,500 catchup for those 50 or older implies a total of $73,500.

Why a Solo 401K vs other options? 

The SEP (Simplified Employee Pension) is another popular retirement plan option that offers similar overall maximization of savings, but it has less flexibility and doesn’t allow for the personal contribution (elective deferral) or the catchup contribution ($7,500 for 50 or older). Technically, a Realtor in a down year making just $22,500, could contribute that entire amount to his or her 401K (the elective deferral). A SEP would only allow 25% of $22,500, or $5,625. Or to make your contribution of $22,500 you would still need to bring in $90,000!

Additionally there’s tremendous optionality if the account is set up under certain terms, including the ability to transfer in old IRAs, borrow 50% of account balance up to $50,000, have a Roth option (post-tax contributions that grow tax-free - though beginning in 2023 Simple and SEP participants can have a Roth option), or even establish checkbook control, which opens the door for a more diversified basket of investment opportunities. A Solo 401K can be a great option to start or continue your long-term savings potential.

What about investing in Real Estate for Retirement?

While the benefits of a 401K are substantial and that’s my pitch today, if you read my prior blogs or know me, you know I like Real Estate for investment purposes. So I like the idea that Real Estate can be used as part of an effective Asset Management strategy to reach timely retirement. Interestingly Realtors largely agree. As noted in the National Association of Realtors 2019 Member Profile, 38% of realtors owned a secondary residence (either vacation or investment property), so many Realtors are investing in what they know.

However, since I preach diversification, I think it might be useful to have multiple options to fund your retirement. We are already seeing caps on property tax deductions, and investing heavily in the industry in which you work can simultaneously negatively impact your income (fewer sales/lower commission) and your asset base (higher vacancy/lower rent/lower valuation/harder to sell) during a downturn. If the need is liquidity, Real Estate won’t provide nearly the impact of the traditional investments you can make in your 401K.

Real Estate Investors Becoming Real Estate “Professionals”

I would be remiss not to mention the benefit of being a Real Estate “Professional” for all the Real Estate investors out there. What does that mean? The everyday Real Estate Investor is limited in the amount of PASSIVE losses they can deduct. These are typically losses that normally accumulate in Real Estate investing, particularly with depreciation and/or significant up-front costs for something like a remodel. However, if you are a Real Estate “Professional”, these passive losses become ACTIVE and can be deducted from your ACTIVE (ordinary) income (what you bring in from working). To be a Real Estate Professional, you must work in the Real Estate industry (agent, construction, appraiser, investor, etc.) at least 750 hours a year (3 hours a day, 5 days a week, 50 weeks a year) and do that job more than any other. Then any losses generated by your Real Estate investment can reduce your taxable income (plus your non-Real Estate industry spouse’s). At certain income levels, this benefit will be phased out, but the opportunities are nonetheless quite interesting!

In closing, I think it’s beneficial for any sole proprietor Real Estate agent to set up a Solo 401K – for the multiple tax benefits, savings opportunities and diversification. I hope you will continue to educate yourself on various financial topics – a great starting point is my blog!

Here are my previous posts:

Why Should I Use a Financial Advisor for Asset Management?

How Do I Get Out of Credit Card Debt and Start a Budget?

Are Maximum 401K Contributions Best for My Asset Management Strategy?

Should I Pay Off My Mortgage Early?

How Can Effective Asset Management Help Me Reach Financial Independence?

How Much Money Do I Need to Save for Retirement?

How Much Should I Save for College?

Why Should a Small Business Owner Have a 401K Plan and What Are the Best Savings Options?

What Financial Advisor Qualities Can Enhance Overall Asset Management?

Best (Most Read) MHB Advisory Blogs of 2019!

If you or someone you know has any financial-related questions, I would love to have a conversation, so please feel free to reach out: matt@mhb-advisory.com.

And stay tuned for additional blog posts on retirement savings and other topics.

Best wishes on your financial path!



This post was created by Matt Beeby, the Founder of MHB Advisory Services. Matt has been working in Financial Services and investing in real estate since 2005, though his investment experience spans nearly two decades. He is a Christ follower, active in both his church and his neighborhood association. Matt enjoys sports and family time. Read more about Matt on his website bio.


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