Personal IRA vs. Employer-Sponsored Retirement Plans

Personal IRA vs. Employer-Sponsored Retirement Plans

June 21, 2022

Are you looking for more ways to save? Who isn’t? Although there’s certainly no lack of options, given the countless retirement savings choices, it’s a challenge to pinpoint 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 Plan (ESRP). 

To simplify the information and help you make the best choice for your particular situation, we’ve narrowed it down to the 3 key differences between these accounts.

1. Contribution Limits

You want to save as much as possible, right? Well, that might determine which account you choose. One major difference between a personal IRA and an ESRP is the contribution limit. For an IRA, in 2022, 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 in 2022 is $20,500, or $27,000 if you are over the age of 50. (2) 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’s 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 $26,500 (or $34,000 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’s 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 your annual income or current tax filing status. 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 $78,000 as a single filer or more than $214,000 as a joint filer, you will not be able to claim any deduction for contributing to a traditional IRA for the 2022 tax year. (3) 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 seehere.

Are You Taking Advantage of All Your Retirement Options?

There are no do-overs when it comes to retirement. It can be nerve-wracking to select an option as your choice will have a long-term effect on your portfolio growth and your ability to reach financial goals to live your ideal retirement lifestyle. If you’re unsure about the retirement options available to you—or if you’re maximizing them—get clarity now! 

Do you need help choosing the best way to grow your wealth? Taking a holistic approach, we at Fiduciary Wealth Managementwork closely with you to not only create a personalized portfolio but to also implement and monitor your strategies on an ongoing basis.

If you choose to partner with us, we’ll help you navigate your retirement account opportunities and maximum contribution limits and strategize appropriately. Schedule a phone call now to schedule a complimentary get-acquainted meeting.

About Rocklin Senavinin, CFP®

With over 20 years of experience in the financial planning industry, Roc has dedicated his career to helping individuals live comfortably in retirement and enjoy the assets they have spent their career building. He is co-founder of Fiduciary Wealth Management, a fee-only registered investment advisory firm in Little Rock, Arkansas. As a CERTIFIED FINANCIAL PLANNER™ professional, he has advanced training in the holistic process of creating a personal financial plan that addresses a person’s comprehensive needs for the short and long term. To learn more, connect with Roc on LinkedIn or visit www.fidwm.com. If you have questions, feel free to schedule a phone call using this link.

DISCLOSURES 

The views expressed represent the opinions of Fiduciary Wealth Management, LLC and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial, or legal advice or service to any person. 

Additional information about Fiduciary Wealth Management, LLC is also available on the SEC’s website at https://www.adviserinfo.sec.gov/Firm/284324. Please call or email with questions.

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(1) https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits#:~:text=More%20In%20Retirement%20Plans&text=For%202022%2C%202021%2C%202020%20and,taxable%20compensation%20for%20the%20year

(2) https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/2022-irs-401k-contribution-limits.aspx

(3) https://www.investopedia.com/articles/retirement/03/011603.asp