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Real estate professionals are experts at helping clients secure their financial futures, guiding home buyers and sellers through a property transaction—often the most significant purchase or sale of their lives. But what about practitioners’ own financial futures?
As independent contractors, most real estate agents lack access to employer-sponsored retirement plans, such as a 401(k) or pension plan. The responsibility for your long-term financial well-being rests solely on your shoulders. Fortunately, being a small business owner gives you access to certain financial mechanisms that help you save more money and grow your nest egg.
Jason Cochran, an agent with Desert Sotheby’s International Realty in Palm Springs, Calif., discovered one solution: a self-directed IRA (SDIRA). “Transitioning from a salaried position to self-employed, commission-based income was concerning,” he recalls. “So, I had to devise creative strategies for additional income while also planning and investing for my eventual retirement.”
Cochran, who is a member of the National Association of REALTORS®, came across IRAR Trust Company, an NAR REALTOR Benefits® partner and provider of self-directed retirement plans. Initially, Cochran was apprehensive about transferring his existing 401(k) from a previous job to a self-directed IRA, but he says he found the process surprisingly smooth—and tax-free.
“In 2017, I transferred a small portion of my 401(k) to my SDIRA and used it to [fund] a flip project,” Cochran explains. “The SDIRA contributed 25%, with the remaining 75% from my personal funds. Seeing how relatively easy and profitable it was, I eventually transferred the remainder of my traditional 401(k) into my SDIRA.”
Since then, he has used his SDIRA to invest in other real estate projects and expand his property portfolio. “My retirement portfolio has grown exponentially from flip profits, rental income and equity,” Cochran says.
He’s not alone: The number of real estate professionals opening self-directed retirement accounts at IRAR has increased an average of 22% year over year since 2021, according to IRAR President Jason Craig.
What Does an SDIRA Do for You?
A self-directed IRA is a retirement account that enables you to take complete control of your investments. You can move beyond the preselected investment options that come with traditional 401(k)s and actively select, buy and sell the assets within your SDIRA account. These assets can include alternative investments like real estate—which you specialize in.
“Traditional brokerages don’t offer such investment options. Big banks typically limit your choices,” Craig says. “While some might promote ‘self-directed IRAs,’ they're not truly self-directed because you can’t invest outside their limited product list. SDIRAs open up all kinds of opportunities.”
Cochran says he found this to be one of the main perks of a self-directed retirement account with IRAR. “I have always been an investor, but I felt that I knew more about real estate than the stock market,” he says.
Benefits of Self-Directed IRAs
SDIRAs give real estate agents greater flexibility and control over their financial future. Here are some of the main benefits:
1. You Can Make Bigger Contributions
Being a small business owner means you have access to a variety of retirement plans built specifically for self-employed people, which enable you to make higher contributions to lower your taxes.
You also have the option to open an SEP, which allows for larger annual contribution limits than a traditional IRA or Roth IRA. In 2024, you can contribute up to 25% of your net income or $69,000, whichever is less. Your business can deduct your contributions to employee SEP accounts. The same maximum contribution limits apply to Solo 401(k) or Individual 401(k) plans, which are great for small business owners with no employees—including most real estate professionals.
2. You’ll See Higher Average ROI
“Self-directed retirement accounts vested in real estate tend to have higher balances than stock market accounts at big banks,” Craig says. For example, the average Fidelity retirement account balance was about $113,000 in the second quarter of 2023, according to data, while the average account balance of an IRAR real estate retirement account was about $276,356. The average ROI for self-directed retirement accounts from real estate also tends to be higher.
3. You Can Build a Guaranteed Income Stream
The thought of running out of money in retirement is enough to keep anyone up at night. “Who wants to be in a panic when something happens?” says Cochran. “What if there is an accident and I can’t work? What happens when I get older and I can’t be self-sufficient? What’s going to happen when I can’t or don’t want to sell homes anymore?”
SDIRAs offer predictable, tax-free rental income from real estate investments that can act as a steady stream of income. “There are no capital gains on the retirement account,” Craig notes. This especially comes in handy if you have rental income, which wouldn’t be taxed while it’s in your IRA. You don’t have to pay taxes on the earnings until they are distributed (tax-deferred)—if at all, in the case of a Roth IRA.
“Essentially, these tax benefits allow you to reinvest the money you would have paid in taxes, accelerating the growth of your real estate retirement empire,” Craig says. “You could be saving 30% on that profit.”
Remember, all contributions and earnings must remain within the IRA to qualify for these tax advantages. It’s crucial to stay informed about IRS regulations and prohibited transactions to ensure your SDIRA remains compliant.
4. You Can Gain Access to New Capital
“Different strategies can be leveraged depending on the size of the retirement account and goals that you have,” Craig says. “You don’t need to have a million dollars to take advantage of this. Your retirement account can get a mortgage or partner with others on a deal.”
Some investment strategies that can be leveraged through SDIRAs include:
- Direct purchase: Use your IRA’s cash to directly purchase real estate investments.
- IRA LLC: Create an LLC owned by your IRA for greater control over the property.
- Partnership: Pool resources with another IRA, investor or even your own personal funds (following IRS guidelines) to increase buying power.
- Non-recourse loans: Leverage your IRA’s ability to obtain loans secured solely by the investment property (not your personal assets).
Agents who work with real estate investors should be familiar with these strategies as a source of creative funding and an opportunity to grow their business.
Cochran took advantage of the partnership investment strategy for his home flipping business. “Prior to this, I was taking out personal loans from my 401(k), but I was limited to one loan per year,” he says. “Now I have access to my full amount. I can partner with myself or with another investor. It gives me a lot of flexibility and, in many cases, a quicker sale.”
Craig cautions that when choosing any investment strategy, “always consult with a financial adviser to ensure your chosen strategy aligns with your retirement goals and complies with IRS regulations.”
And don’t forget, Cochran stresses: “You have to keep really good records of expenses. You cannot co-mingle your business and personal funds when you are partnering with your IRA.”
Taking action now is crucial for a secure future. Self-directed IRAs offer a compelling alternative to traditional retirement plans, which may expose you to stock market volatility. Plus, SDIRAs enable you to diversify your portfolio by investing in what you know best: real estate. As Cochran says, that peace of mind is almost priceless: “For me, it gives me the most control over my money.”
NAR REALTOR Benefits® offers an exclusive discounted flat annual fee for self-directed retirement accounts with IRAR Trust Company. Find out how to open an account.