By Greg Hart, CFP®
If you’re looking for ways to save, you don’t have a 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), such as 401(k)s and 403(b)s.
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 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!
Do you need help choosing the best way to grow your wealth? We at Haddon Wealth Management enjoy solving our clients’ retirement planning challenges and offering a comprehensive range of financial services. Not only do we work with you on a personal level to determine the best solutions for your unique needs and leverage our seasoned expertise to achieve the best results possible, but, as a fiduciary firm, we do it all by putting you first and giving you the individual attention you deserve.
If you choose to partner with us, we’ll help you navigate your retirement account opportunities and maximum contribution limits and strategize appropriately. Call us at (856) 888-1744 or contact us online to schedule a complimentary get-acquainted meeting.
Gregory M. Hart, CFP® is the founder and managing director of Haddon Wealth Management, LLC, an independent, fee-only registered investment advisory (RIA) firm that provides comprehensive wealth management (in-depth financial planning and sophisticated investment management) for clients who value a relationship-driven approach that delivers customized solutions. Based in Haddonfield, New Jersey, Greg works with clients throughout the Delaware Valley, as well as nationwide. To learn more, connect with Greg on LinkedIn, visit our website at www.haddonwealthmgt.com, or call (856)-888-1744 to begin a discussion.