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3 Key Differences Between a Personal IRA and an Employer-Sponsored Retirement Plan

3 Key Differences Between a Personal IRA and an Employer-Sponsored Retirement Plan

November 22, 2022
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When we start a job, employee benefits are a big part of the compensation package. For most of us, we accept the employee-sponsored plan as our only option, but should we be looking outside of our employee-sponsored plans when it comes to saving for retirement?

With most financial decisions, it will depend on your unique situation, but to help you make that choice, we’ve narrowed it down to 3 key differences between these two types of retirement accounts.

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 $20,500, or $27,000 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 $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 investment options. There are generally more stocks, bonds, mutual funds, and index funds to choose from as 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. The above is also true for traditional and Roth IRA’s.

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 $129,000 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! 

At 1on1 Financial, we specialize in guiding working and retired professionals, executives, and business owners along the path to financial well-being. We help our clients accumulate wealth, generate income, preserve their life savings, and strategically plan for the distribution of their estate. Learn more by calling our office at 909-981-1720 or simply click here to schedule a free 15-minute introductory phone call!

About 1on1 Financial

1on1 Financial is an independent financial advisory firm specializing in guiding working and retired professionals, executives, and business owners along the path to financial well-being. Founded in 1997, we use a team approach to help our clients accumulate wealth, generate income, preserve their life savings, and strategically plan for the distribution of their estate. With more than 50 years of combined experience in the financial services industry, we remain true to our fundamental mission: to provide personalized guidance, treatment, care, and service so our clients can gain control of their future and feel confident in their financial life.