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Employer IRA vs. Personal IRA

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  • Employer IRA vs. Personal IRA

    Two part question:

    The IRS website declares that traditional IRA (non Roth personal accounts) are tax deductible up to certain points depending on whether or not "you are covered by an employer's retirement account".  Does that mean that if an employer offers a retirement account, I decline and choose to save in an IRA personally it falls under "covered by an employer's account" because I have coverage, but have declined it, or does it term "coverage" as being actively involved financially with the employer's account?

    In a situation where the employer does not match IRA contributions, is there any downside to have no employer retirement contributions and have the money invested into an IRA of MY choosing (assuming reimbursement of income taxes in April)?

  • #2
    If you have any employer contributions that are mandatory, then you are covered (as those contributions have to be made whether you opt out or not).  Otherwise, if you opt out of the plan, then you are not covered, and your IRA contribution would be deductible regardless of your income (please verify this with your CPA in any case). There are definitely situations where you want to opt out of employer's plan.  Some plans don't match anything, and moreover are top heavy so that HCE's contributions are routinely disallowed, making this plan a waste of time.  Also, these same plans often have very low quality investment choices.  In that case, an IRA at Vanguard or other discount brokerage makes a lot of sense. Before you do that though, maybe your plan has a brokerage window and that can be used to invest in low cost index funds.  Also, when you are in a low tax bracket, I would suggest to do as much Roth contributions as possible, so tax deduction is not such a big deal early on (it will be when you are in the highest tax brackets).
    Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees