An enjoyable and fulfilling retirement has never sounded sweeter. But before you start packing your bags for your dream vacation, make sure your retirement accounts can foot the bill—and all the bills to follow. That’s right; the golden years don’t come without active planning and saving. There are plenty of retirement savings options; the problem is finding the right 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). Let’s cover the 3 key differences between these accounts so you can 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 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 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 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 a few limitations on income, which you can see here.
Are You Taking Advantage Of All Your Retirement Options?
Once you pack up your office for good and the steady paychecks cease, you want to be confident that all your years of hard work will pay off in retirement. Your funds need to last at least as long as you do, but your savings options can be overwhelming. These options have a long-term effect on growing your portfolio and your ability to reach financial goals to live the retirement lifestyle you want and can enjoy. So if you’re not sure what all your retirement options are, or if you’re not certain you’re maximizing them, there’s no better time than now to get clarity.
We at Whittenburg Wealth Partners specialize in handling the many aspects of retirement planning, and we’re here to help you choose the best way to grow your wealth to move closer to your ideal retirement. If you choose to partner with us, we will navigate your retirement account opportunities and maximum contribution limits and strategize appropriately. Allow us to take the burden off you. If you think our firm would be a good fit for your financial needs, easily schedule a no-fee, no-obligation virtual appointment or contact us at 801-839-7050 or firstname.lastname@example.org.
Austyn Whittenburg is a wealth planner and partner at Whittenburg Wealth Partners, a family-owned and family-operated financial and wealth management firm located in Salt Lake City, Utah. Austyn has 7 years of experience as a wealth planner and spends his days helping business owners, emerging successful families, and their ensuing generations simplify their financial lives and discover meaningful solutions. Austyn received a Bachelor of Science in Finance from Brigham Young University and holds the Certified Financial Planner™ (CFP®) and Certified Business Exit Consultant (CBEC®) credentials, his FINRA Series 7 through LPL Financial and 66 registrations through LPL Financial and Stratos Wealth Partners, and his life, health, disability, and annuity insurance licenses. Austyn is active in his community of Herriman, Utah, where he resides with his wife, Ciera, and two young sons, Grayson and Graham.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Stratos Wealth Partners, Ltd., a registered investment advisor. Stratos Wealth Partners, Ltd. and Whittenburg Wealth Partners are separate entities from LPL Financial.