Personal IRA Vs. Employer-Sponsored Retirement Plans
By Preston Rosamond
The stage of life after retiring from a career is often referred to as “the golden years.” More time for family, traveling, and hobbies…what could be better? And after the year we’ve just been through, I’m willing to bet everyone’s looking forward to a peaceful retirement now more than ever. But those golden years don’t come without active planning and saving. There are countless retirement savings options—the problem is finding the best account for your unique needs.
The two most common retirement savings vehicles used to maximize growth and ultimately reach your goals for retirement are the Individual Retirement Account (IRA) and Employer-Sponsored Retirement Plans (ESRPs). To help consolidate the information, we’ve compiled the 3 key differences between these two accounts to help you make the best choice for your particular situation.
1. Contribution Limits
You want to save as much as possible, right? Well, that might determine what account you choose. One major difference between a personal IRA and an ESRP is the contribution limit. For an IRA, you can contribute up to $6,000 per year if you are under the age of 50, or $7,000 per year if you are age 50 or older.
On the other hand, the maximum annual contribution for ESRPs is $19,500, or $26,000 if you are over the age of 50. And that’s just how much you can contribute; anything your employer chooses to match or contribute doesn’t count toward that limit.
Although it is wise to make sure you contribute enough to receive any match your company
offers through an ESRP and max out those accounts each year, if possible, anyone with a taxable income can contribute to an IRA as well. This increases your total contribution limit to $25,500, or $33,000 for those 50 and older, each year when you max out both an IRA and an ESRP.
2. Investment Options
IRAs are accounts you open and can control, which means you have quite a few more options. Stocks, bonds, mutual funds, and index funds to choose from compared to what your ESRP offers. Employers select a certain number of investment options to offer and that is all you get. You tend to have more flexibility with where your money is invested with an IRA.
Choosing investment options using an IRA and contributing the full $6,000 per year to the account before making maximum contributions to your ESRP could be a wise strategy, depending on how advantageous the employer-selected options are for your financial situation. Also, watch out for fees with your ESRP funds. With fewer options, you may not have as many low-fee choices as an IRA.
3. Tax Implications
Would you like to save more on taxes? That’s what I thought. How you save your money impacts your tax treatment, so pay attention to this point.
Many employers now allow their employees to choose how to invest their money: in a traditional ESRP or Roth ESRP. With traditional ESRPs, you can claim a deduction on the full amount of your contribution, no matter what your annual income or tax filing status is currently. The difference between contributing to a traditional versus a Roth account is you are using pre-tax dollars for traditional contributions and post-tax dollars for Roth ESRP contributions. Contributions using pre-tax dollars allow you to claim the deduction now and be taxed on your withdrawals later. Alternatively, if you contribute to a Roth account using post-tax dollars, all growth and contributions grow tax-free, but you are not able to claim a tax deduction. This is also true of Roth and traditional IRAs.
This is where things can get confusing. If you are covered by an ESRP and make more than $75,000 as a single filer or more than $124,000 as a joint filer, you will not be able to claim any deduction for contributing to a traditional IRA. If you don’t have the option to contribute to an ESRP, you can claim a deduction on your contributions to an IRA, but there are a few limitations on income, which you can see here.
Are You Taking Advantage Of All Your Retirement Options?
These options have a long-term effect on your portfolio growth and your ability to reach financial goals to live your ideal retirement lifestyle. And because there are no do-overs when it comes to retirement, it can be nerve-wracking to make your selection. So if you’re unsure about the retirement options available to you—or if you’re maximizing them—get clarity now!
If you need help choosing the best way to grow your wealth, The Rosamond Financial Group is here for you. We specialize in handling the many aspects of retirement planning, taking the burden off of you. If you choose to partner with us, we will navigate your retirement account opportunities and maximum contribution limits and strategize appropriately. To get in touch, call my office at 830-798-9400 or email smrosamond@rosamondfinancialgroup.com.
About Preston
Preston Rosamond is a financial advisor and the founder of The Rosamond Financial Group Wealth Management, LLC with nearly two decades of industry experience. He provides comprehensive wealth management and financial services to individuals, professionals, and families who enjoy simplicity and seek a professional to help them pursue their goals. Preston personally serves his clients with an individual touch, a sincere heart, and his servant’s attitude is evident from the moment you meet him. Learn more about Preston or start the conversation about your finances with him by emailing smrosamond@rosamondfinancialgroup.com or schedule a call with our online calendar.