Have you been daydreaming about your retirement lately? After the past year we’ve just had, who isn’t? I’m sure a relaxing and fulfilling retirement has never sounded sweeter, but not so fast! Before you begin packing your bags for that dream vacation, you’ll need to ensure your retirement accounts can foot the bill—not to mention all the bills to follow. Reality check: making your retirement years “golden” requires active planning and saving. There are countless retirement savings options—the problem is finding the account best suited 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 discuss the 3 key differences between these accounts so you can make the best selection given 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?
We understand that you want to say goodbye to your career free of regrets, and enter this next chapter of life with confidence. Now that those steady paychecks have stopped, will your funds last as long as you need them to? Your savings options have a long-term effect on your portfolio growth and your ability to reach financial goals to live the retirement lifestyle you want—so making the right choice can be overwhelming! If you’re uncertain about your retirement options, or if you’re maximizing them, now is the time to get clarity.
About Shelton Financial Group
Shelton Financial Group is an independent, multi-generational firm in North East Indiana that takes a team approach to addressing their clients most pressing financial concerns. SFG was founded in 1996 with the mission of helping people enjoy their wealth. Using their proprietary “One Life Formula,” the team at SFG focuses on what matters most to their clients and what they can control, integrating their wealth management needs with other aspects of their financial picture. To learn more about Shelton Financial Group and how they can help you achieve financial independence,.