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Which Retirement Plan Is Right for You: IRA or Employer-Sponsored Plan?   Thumbnail

Which Retirement Plan Is Right for You: IRA or Employer-Sponsored Plan?

By Trent Derrick, CMT®

We work for many reasons. It might be for enjoyment. It could be the compensation. And often a large part of our work is to save for the future—namely retirement. Those are great days to look forward to (they don’t call them golden years for nothing!). But before that happens, you need to spend the time preparing to make those financial dreams a reality.

Here’s the reality, though…there are so many different retirement options out there that it can get confusing to find out which one can help you best given your unique situation. Don’t let that overwhelm you! That’s why I’m here to help you.

The two most common retirement savings vehicles used to maximize growth and ultimately realize your goals for retirement are the individual retirement account (IRA) and the employer-sponsored retirement plan (ESRP). 

To simplify the information and help you make an informed choice for your particular situation, let’s identify the 3 key differences between these two 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 $6,500 per year if you are under the age of 50, or $7,500 per year if you are age 50 or older. (1)

On the other hand, the maximum annual contribution for ESRPs is $22,500, or $30,000 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 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. (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: (4)

Source: IRS

Are You Taking Advantage of All Your Retirement Options?

Let’s be clear, even with this information, knowing which choice to make can be a little terrifying. The time you have to plan for retirement is limited and there are no do-overs, which means you must be crystal clear on which direction to take as soon as possible.

But like I said, you are not alone in this. At Legacy Wealth Management, my goal is to help you develop the focus about where you want to go. Together we determine what makes your financial story unique and make decisions that set you up for future success. Partnering with a financial advisor may sound tricky, but my ultimate passion is to see you realize your dreams. If you are ready to take that step, book a consultation with me here or email me at trent@legacywm.com.  

About Trent

Trent Derrick is a financial advisor and Chief Market Technician at Legacy Wealth Management. Trent is passionate about the value small businesses bring to their communities and specializes in serving small business owners by providing seamless financial advisory services tailored to their financial needs, including tax planning strategies, cash flow management, and retirement planning. Trent has a bachelor’s degree from the College of Charleston and studied economics at the University of South Carolina, Columbia. He is a Chartered Market Technician® (CMT®) professional. Trent serves as a guest lecturer for the College of Charleston’s MBA program and acts as chairman of the Market Technician Association’s Charleston chapter. When he’s not working, Trent, a proud Eagle Scout, enjoys volunteering with the Charleston Animal Shelter’s outreach program. Trent and his wife love to cook international cuisines and host dinner parties with their friends. To learn more about Trent, connect with him on LinkedIn.

The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision. 

Legacy Wealth Management and LPL Financial do not offer tax advice or services.


(1) https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits

(2) https://www.irs.gov/newsroom/taxpayers-should-review-the-401k-and-ira-limit-increases-for-2023

(3) https://www.irs.gov/retirement-plans/2023-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work

(4) https://www.irs.gov/retirement-plans/2023-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-not-covered-by-a-retirement-plan-at-work