If you’re stashing away cash for your golden years, you’re ahead of the game. A 2018 study by Northwestern Mutual found that one in three Americans have less than $5,000 in retirement savings. And what’s even worse, one in five Americans have no retirement savings at all.
Since 401(k) accounts are the most popular way to save for retirement, you may find yourself with more than one in the course of your career. If you move jobs several times, chances are you have multiple 401(k) accounts in your name.
People who work more than one job or own their own business on the side may have the option to contribute to two or even three 401(k)’s at a time.
In addition, many people end up contributing to a traditional Individual Retirement Account (IRA), a Roth IRA or a 403(b). Each one has its own set of rules on contribution limits and tax advantages. Review the rules for each type of retirement account closely to ensure you follow them.
Before going over what’s allowed and where you can run into trouble, let’s talk about what is a 401(k) account and how it differs from other retirement options.
Many employers offer the option to save for retirement using a 401(k) account. This type of account is named for the section of the tax code that helped establish it. It offers tax advantages for employees who use it to stash cash for their golden years.
Employers usually offers a match on contributions made by employees. For example, the company may offer to match dollar-for-dollar contributions made by employees up to a certain amount. This is free money in addition to your salary and can be a great way to supercharge your savings.
You cannot tap the money in your 401(k) account until age 55 or 59.5 or you will face a 10 percent early withdrawal penalty. Once you reach 55 or 59.5, you can withdraw your contributions, earnings and dividends penalty-free. Keep in mind you will have to pay income tax on the distributions from a traditional 401(k) account.
You may also have the option to contribute to a Roth 401(k) account. Unlike traditional 401(k) accounts, money contributed to a Roth 401(k) are taxed similarly to a Roth IRA. However, all earnings and contributions can be withdrawn tax-free upon reaching 55 or 59.5 years of age. This can be an advantage for those who may be in a higher tax bracket in retirement.
The contribution limit for a 401(k) account is $19,500 for 2020. The Internal Revenue Service (IRS) reviews and adjusts these limits regularly to account for inflation. If you’re 50 years of age or older, you can contribute an additional $6,500 to your 401(k) for a total of $26,000 in 2020.
The contribution limits also apply for Roth 401(k) accounts. This means if you contribute to both, you will have to decide how much of the $19,500 you want to contribute to each one.
The $19,500 limit also does not include employer contributions. Employers can do a matching contribution in excess of the $19,500 limit (or the combined $26,000 for people age 50 or older) but more on that below.
The short answer is yes. You can have more than one 401(k) account as long as the total contributed to both accounts in any given year does not exceed $19,500 (or $26,000 for ages 50 or older).
If you’re self-employed or have two jobs, you can contribute to 401(k) accounts for each one. If you separate from your employer, you have the option of leaving your 401(k) where it is (provided your former plan’s rules allow it) or roll it over.
The funds can be rolled over into an IRA or into your new 401(k) account. You can also withdraw the assets in a lump sum (not recommended) or transfer them into a qualified annuity.
The two most common scenarios for employees who switch jobs are to leave the 401(k) with the previous employer or roll it over into an IRA. Keep reading to find out more about the pros and cons of each option.
While having more than one 401(k) account is fine, there are a few rules of thumb you should keep in mind. Knowing these will help you make informed decisions about your retirement accounts and ensure you’re maximizing your earnings.
Here’s what you need to know about having multiple retirement accounts.
The total an employee can contribute in 2020 to all 401(k) and/or 403(b) accounts in a given year is $19,500 ($26,000 if over 50).
If you have more than one account, you can split the contributions between them but the total for the year must be no more than $19,500. This rule also applies if you have more than one employer.
The total contribution limit for a 401(k) for you and your employer is $57,000 per year. This number includes the employee contribution, the employer match, and any employer contributions.
This IRS rule also applies to small businesses where the owner may be contributing both as an employee and an employer to their 401(k) plan. However, unlike the employee contribution rule, this rule applies to each unrelated employer separately.
What does this mean? If you have a full-time job and also own your own business, you can have two different 401(k) accounts. While your contribution as an employee to both cannot exceed $19,500 before age 50, each employer can contribute up to the $57,000 total cap.
If you own your own business, you are limited to putting in 20 percent of net earnings from self-employment into a 401(k) account. This does include the employee contribution to the retirement account.
Net earnings exclude the amount used for S-Corp distributions since it’s not considered earned income.
If you have more than one unrelated employer, you can only have one 401(k), SEP-IRA, or SIMPLE IRA account each tax year. This mostly applies to people who are self-employed and can open an individual 401(k) account or go the SEP-IRA or SIMPLE IRA route.
A SEP-IRA stands for simplified employee pension individual retirement account and offers the option to defer taxes on contributions until retirement. A SIMPLE IRA stands for savings incentive match for employees. It’s an alternative to a 401(k) and can be more cost effective for small businesses.
You can only open one of these accounts per tax year but can opt for a SEP-IRA one tax year and a 401(k) the next.
If you’re older than 50, the IRS gives you a loophole around the $55,000 total contribution limit. You can contribute an additional $6,000 on top of the $57,000 limit for a total of $63,000. This can be particularly helpful if you’re self-employed with a high income.
The rules for 403(b) accounts differ from those for 401(k). You may be contributing to a 403(b) at work without even knowing it. If you’re employed by a hospital or a public entity, you may have access to a 403(b) account.
Here’s where this comes into play: If you are employed by a hospital or public entity but also own and run a business on the side, the total contribution for both accounts is limited to $57,000.
That’s because the IRS considers 403(b) accounts to be controlled by employees so they are counted as part of the $57,000 annual cap.
The IRS has a different set of rules for each type of retirement account. This includes both contribution limits as well as how many of each type of account you can contribute each tax year.
As a general rule of thumb, you can have multiple 401(k) accounts but need to pay attention when it comes to self-employed retirement options. Consult with a qualified accountant or a trusted financial advisor about your particular situation.
While there are no IRS rules against having multiple 401(k) accounts, you may want to think twice about it. The fewer accounts you have, the easier it is to manage your retirement planning and the less paperwork you will have.
In addition, each 401(k) account comes with its own set of fees, asset allocation decisions, taxes, beneficiaries, and so on. If you change your job five times in the course of your career, this means managing five individual 401(k) accounts.
Many people decide to roll over their 401(k) account from their previous employer into the one offered by their current one or an IRA. Having all retirement savings under one umbrella can make it easier to manage your investments and plan for retirement.
On the flip side, if your new employer’s 401(k) account comes with higher fees and limited choices, you may be better off leaving your retirement plan behind.
Low management fees and diverse investment options can make a big difference to your retirement account earnings. In this situation, the small hassle of having more than one 401(k) account is worth it.
Before making any decisions about your multiple 401(k) accounts, review the retirement options available from your new employer. Keep in mind that you can also roll over your retirement account from a previous employer into an independent IRA account such as the ones offered by Vanguard, T. Rowe Price or Fidelity.
Other options include discount brokerages such as Ally Invest and TD Ameritrade.
When it comes to being self-employed, you can have both a 401(k) account from your full-time job and also fund one using the income from a side business.
There are no rules against having multiple 401(k) accounts. However, how many 401(k) plans you have depends on your individual situation and what works best for you. Some people opt to roll the 401(k) from their previous employer into their new retirement account when they switch jobs.
This can be a good option because it minimizes your paperwork and puts all of your 401(k) account contributions under one umbrella. However, if your new employer offers limited investment options and charges high fees, this move can cost you money and limit the growth of your retirement savings.
Consult with a trusted financial advisor on the best course of action if you have multiple 401(k) accounts. They can help you figure out what makes sense for your particular situation while taking into consideration your retirement savings goals.
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