Personal IRA Vs. Employer-Sponsored Retirement Plans

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If you are close to retirement and are looking for ways to beef up your retirement accounts, you have no lack of options for how to build up a nest egg. The problem is finding the right account for your 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). Let’s go through 3 key differences between these accounts so you can make the best choice for your 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.1

On the other hand, the maximum annual contribution for ESRPs is $26,000, (or $19,500 if you are under the age of 50). But that’s just how much you can contribute; anything your employer chooses to match or contribute does not 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 $33,000 for those 50 and older each year ($25,500 if you're younger) 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 stock options, mutual funds, index funds, and bonds to choose from compared to what your ESRP offers. Employers select a certain number of investment options to offer and that is what you get, which means 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 that 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 we 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 that you are using pre-tax dollars for traditional contributions and post-tax dollars if you contribute to a Roth ESRP.

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 few limitations on income, which you can see here.2

Are You Taking Advantage Of All Your Retirement Options?

It’s important to know your retirement account opportunities and maximum contribution limits and strategize appropriately, as they have a long-term effect on growing your portfolio and your ability to reach financial goals to live a lifestyle you can enjoy. 

At Rubino & Liang Wealth Partners, we specialize in handling the many aspects of retirement planning. If you need help choosing the best way to grow your wealth, we are here for you.

1 - https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits

2 - https://www.irs.gov/retirement-plans/plan-participant-employee/2020-ira-contribution-and-deduction-limits-effect-of-modified-agi-on-deductible-contributions-if-you-are-not-covered-by-a-retirement-plan-at-work

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