By Brian Bloxom, ChFEBCSM
Each day you spend working brings you closer to the home stretch of your career and the anticipated period known as the golden years. With more time to spend on family, travel, and hobbies, life couldn’t get any better. But turning your ideal retirement into the reality you desire requires careful planning and saving—and it won’t magically happen overnight.
With numerous retirement savings options available, selecting the best account that aligns with your specific needs can be a daunting task. The two most popular retirement savings vehicles used to optimize growth and accomplish your retirement goals are individual retirement accounts (IRAs) and employer-sponsored retirement plans (ESRPs).
To assist you in making an informed decision tailored to your situation, we want to simplify and break it all down. Read the following from our team to identify three fundamental differences between these two accounts and determine which one is right for you.
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 $6,500 per year if you are under the age of 50, or $7,500 per year if you are age 50 or older.
On the other hand, the maximum annual contribution for ESRPs is $22,500, or $30,000 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 $29,000, or $37,500 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 $6,500 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. 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 $83,000 as a single filer or more than $136,000 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.
Take Advantage of All Your Retirement Options
The choices you make regarding retirement plans may have a significant impact on your portfolio growth and your ability to realize your financial objectives. The goal is to create your plan in a way that enables you to enjoy the retirement lifestyle you desire. Given that there are no second chances with retirement, it can be anxiety-inducing to make the right selection.
Are you struggling to decide on the optimal strategy to enhance your wealth? At Sentinel Wealth Partners, we thrive on resolving clients’ retirement planning dilemmas by offering a broad range of financial services. Collaborating as a team, we identify solutions that align with your needs while harnessing our extensive experience to deliver optimal outcomes.
We can help you understand and manage these moving pieces so you spend your retirement doing one thing: enjoying it. If you’re unsure about the retirement options available to you, or if you’re making the most of them, reach out to us today by calling our office at 703-832-0164, sending an email to [email protected], or using our online calendar.
About Brian
Brian Bloxom is an Independent Financial Advisor, Chartered Federal Employee Benefits ConsultantSM (ChFEBCSM) and Chartered Retirement Planning Counselor℠, CRPC® professional with 25 years of experience in financial advising. He founded Sentinel Wealth Partners to serve retirees, individuals approaching retirement, and individuals managing complex retirement plans such as company plans or federal benefits plans. His expertise and dedication to helping his clients achieve their goals make him a trusted resource that will help you feel confident in your customized retirement plan. Brian’s mission is to be available to his clients—all the time. He’s here to solve your problems, relieve your anxiety, and give you optimism for retirement. Because ultimately, your retirement should be about well-deserved enjoyment, and not about stress or anxiety. When he’s not working, you can find Brian spending time with his wife, Jessica, and their two sons, Spencer and Preston. He enjoys coaching soccer, serving in his community, golfing, and relaxing at his vacation home at Lake Anna, VA. To learn more about Brian, connect with him on LinkedIn.
Disclosure
“Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Sentinel Wealth Partners and Cambridge are not affiliated. Sentinel Wealth Partners is not engaged in the securities business. Cambridge does not offer tax or legal advice.”