The document discusses various retirement plans available for real estate investors, including 401k, SEP IRA, solo 401k, and cash balance plans, along with their benefits. It also highlights the importance of employee side businesses for job satisfaction and productivity, and explains how real estate income should be reported, differentiating between active and passive income. Additionally, the document covers tax treatments for short-term versus long-term rentals and emphasizes the need for retirement plan advisors.

1. There are several ways to invest in real estate. However, it depends on a few factors if real estate
investors can have a 401k plan.
While the joys of being a real estate investor are many, so are the stressors. One of the main stressors is
that you have to plan for retirement by yourself, unlike when you are employed.
Luckily, there are various retirement savings plans that were created to house all kinds of professions.
One such plan is the 401k plan. This is a retirement savings plan that allows individuals to save a certain
percentage of each paycheck directly to a long-term investment account. So, to answer the question
“can real estate investors have a 401k plan,” the answer is yes.
Here is everything you need to know about real estate investors’ 401k plans.
What Retirement Plans Can Be Used by Real Estate Investors?
Here are a few retirement plans for real estate investors. Like other plans, these three plans have
various tax benefits depending on which you choose. These plans are:
1. SEP IRA
Simplified Employee Pension IRA is a type of traditional IRA that was created to extend the IRA concept
to small businesses. It is set up and funded by the owner. Any business entity can set up a SEP IRA
whether it has employees or not.
It is a great choice because it is easy to set up, has no administrative overhead, the savings are tax-
deferred, and has much higher contribution limits compared to Roth or traditional IRA.

2. With that, the tax deductions for a SEP IRA are much higher than that of an IRA.
2. Solo 401k
The solo 401k plan was designed for solo entrepreneurs without full-time employees. As such, if you run
a business that has another employee other than yourself and a spouse, you are not eligible for a solo
401k.
A Solo 401k offers similar contribution limits to the SEP IRA. However, the way your contributions are
calculated require less income to reach those limits. It also offers a Roth option to the employee
portion.
3. Cash Balance Plan
A cash balance plan is different from a 401k plan as it is a defined benefit plan. This is as opposed to the
401k, which is considered a defined contribution plan. That means it guarantees a certain amount of
benefit in retirement in terms of a stated account balance.
Each participant in the cash balance plan has an account. The account grows in two ways: the annual
contribution, and an interest credit with a rate of return that is typically set by an actuary.
When the participants retire or terminate their employment, they receive the vested portion of their
account balances.
A Financially Secure Workforce is More Productive
Financial insecurity can take a toll on your employees’ productivity, directly affecting your business.
Regardless of how much you pay your employees, most are always worried about potential changes that
could render them jobless.
Anxiety triggered by money affects relationships, psychological health, and physical health. Employees
who have side business regardless of its size are more confident because they have an alternative plan.
The confidence and peace of mind boost their productivity, creativity, and commitment to you. Besides,
they may use income from their side hustles to pay their debts, which helps them remain calmer.
Help them Find Satisfaction
According to 2019 Gartner’s, employees study in the United States, only 13% seem to find satisfaction in
their jobs. And over 46% of workers are dissatisfied.
If your employees feel unsatisfied, they may not offer an exceptional service. Supporting their side
business helps them fulfill their purpose and lead happier lives.
The fact that your employees find their side business more fulfilling should not worry you because most
still keep their day job. Their side business gives them renewed energy needed to run your business
activities.

3. In this condition, they’ll address customers better, be more organized and become better time
managers.
A Side Business Helps Employees Better their Skills
Even if you’ve constantly been offering training courses to your workforce, it may not bear results like
running a side hustle.
A side business offers both skills and experience. This way, your employee will improve their existing
skills and master new skills in the process.
They’ll improve their communication skills, problem-solving skills, financial management skills, and so
on.
The knowledge gained from side hustles is a great asset to your business. Keep in mind that a well-
equipped and skilled workforce is a lifeline to your business.
5. LLCs
A limited liability company has the pass-through taxation of a partnership and the limited liability of a
corporation. It is a great choice for long-term real estate investors and rental properties. On the
downside, it is usually dissolved in the event of death or bankruptcy.
6. Single-Member LLCs
Just as the name suggests, a single-member LLC is an LLC that has a single owner instead of more than
one. It has all the advantages and disadvantages of a multi-member limited liability company.
Taxes are collected through the owner’s personal tax returns.
7. Sole Proprietorship
A sole proprietorship is an entity structure for real estate investors if they want to do everything by
themselves without forming anything. It is the easiest to form and doesn’t have extra tax returns. On the
downside, a sole proprietorship has unlimited liability.
Where Should a Real Estate Investor Report Income?
There are two types of income for a real estate investor: active and passive. If you qualify to be a real
estate professional, your rental income is considered active. Otherwise, it is considered passive.
You are considered a professional if you meet the two requirements below.
“More than half of the personal services you perform in all trades or businesses during the tax year are
performed in real property trades or businesses in which you materially participate.”

4. “You perform more than 750 hours of services during the tax year in real property trades or businesses
in which you materially participate.”
Schedule E is used to report passive income, while schedule C, K-1, W-2, etc are for reporting active
income.
Income for owners of S-Corporations and individual partners in a partnership is reported on Schedule E,
while that for corporations, sole proprietors, and single-owner LLCs isn’t.
How Short-Term Rentals vs. Long-Term Rentals Can Be Taxed Differently
The difference between long and short-term rentals depends on the time and not the property type.
Any property rented for one month or less is considered a short-term rental. A long-term rental is a
property rented for longer than one month.
Long and short-term rentals have their own unique tax treatments as broken down below.
Unlike long-term rentals, furniture, property decorations, and painting among others are tax-deductible
for short-term rentals.
You don’t need to pay property taxes if you run a short-term rental through rental arbitrage. You also
won’t need to insure property appliances.
Homeowner associations and property taxes are included in long-term rental costs.
In some states and countries, long-term rentals have a much higher tax rate compared to short-term
rentals.
Long-term rentals enjoy deductions such as depreciation, property taxes, repairs, and mortgage interest.
Hire a Retirement Plan Advisor
There comes a time in the life of a successful real estate investor when it’s imperative to consider ways
to allocate duties. For many, top of the list of delegating is the administration of the 401k plan.
Where there are several methods for delegating the management of a 401k plan, there is now a trend
towards hiring a 401(k) specialty firm or advisor that takes on nearly all the fiduciary liability associated
with the investment process.
At Ivory Hill, we assist you in designing a plan fit for your business, and offer administrator and fiduciary
support to keep your plan compliant.

5. Best regards,
Kurt S. Altrichter, CRPS®
Fiduciary Advisor | President
Direct: 952.828.5336
Email: kurt@ivoryhill.com
—Written 03.14.2022.