Eligibility for Multiple 401(k) Accounts
Having multiple 401(k) accounts is possible under certain circumstances. Your eligibility depends on several factors, including employment status, the types of 401(k) plans offered by your respective employers, and your individual retirement planning needs.
Let’s explore some common circumstances and how they impact your 401(k) accounts.
Employees with Multiple Jobs
Employees with multiple jobs may be eligible to contribute to each employer’s 401(k) plans as long as they meet the plan’s requirements. The IRS sets contribution limits for each tax year, which are tied to the individual, not just the account. This means that your total contributions across all 401(k) retirement savings accounts will have to fall under the maximum—$22,500 for those under 50, and $30,000 for those 50 and over (for tax year 2023).
Staying within the annual contribution limit across all retirement plans is essential to avoid costly penalties.
Helpful note: remember that this total limit is separate from your contributions to traditional IRAs or Roth IRAs if you have them.
Self-employed Individuals and Small Business Owners
Self-employed individuals and small business owners can establish and contribute to their own 401(k) plan, known as a solo 401(k) or Individual 401(k). This applies to those who don’t have access to an employer-sponsored plan of any kind or those who are participating in an employer-sponsored 401(k) from another job and run their own business on the side.
There are many benefits to a solo 401(k):
- There are higher contribution limits because you can make employee contributions and employer contributions from your self-employment income.
- You have more customized investment options since you get to choose your own plan administrator.
- You’ll have access to a solo Roth 401(k) option with various tax advantages, including the potential for tax-free withdrawals in retirement.
Previous Employer Accounts and Rollovers
You might have a 401(k) retirement account with a previous employer. While there is an option to keep the retirement account as-is, most often, it is advisable to roll over those retirement savings to your new employer’s 401(k) plan, an IRA, or another qualified retirement plan.
Each rollover option has its benefits and drawbacks, including more diverse investment options, lower fees, tax advantages, and more, depending on what you ultimately choose.
Benefits of Having Multiple 401(k) Accounts
While managing multiple 401(k) accounts can be more complex, there can be benefits in some circumstances, as long as you carefully consider your financial planning in its totality.
Let’s explore those upsides.
Diversification and Investment Options
Multiple 401(k) accounts can give you more investment options. This may be especially true if you have a solo 401(k), which gives you control over your plan administrator.
Diversifying your investment portfolio is also essential for successful retirement planning. Holding many asset classes will help you mitigate risk to ensure your funding meets your goals when you need to start taking distributions.
Maximizing Employer Contributions and Catch-Up Contributions
Employees with multiple 401(k) accounts can use multiple employer matching programs and catch-up contributions if they are over 50. While your employee contributions are limited, your employer matching contributions are attached to the plan, not the individual. So, holding multiple pre-tax 401(k) accounts could help you make the most of your employer’s “free money” from multiple jobs.
Drawbacks of Having Multiple 401(k) Accounts
As we mentioned, managing multiple 401(k) accounts can come with some challenges and potential drawbacks. Before you choose to keep your numerous accounts with multiple brokerages, consider the risks involved.
Managing Multiple Accounts
Managing multiple 401(k) accounts can be challenging, as it requires keeping track of investment performance, fees, and account balances across multiple financial institutions. This can make it hard to comply with all IRS rules, and tracking your total asset allocation across many platforms can make your strategy inefficient. Seeking a financial advisor’s input can help you navigate these challenges.
Meeting Contribution Limits
As we mentioned, the IRS outlines an annual limit for one individual’s total contributions to 401(k) accounts. Following these maximum contribution guidelines is essential to avoid additional taxes and/or unnecessary penalties.
If you have a solo 401(k), the limit will be different than your standard employee contribution limit, but either way, you’ll need to monitor your total contribution limits closely.
Real-Life Examples of Managing Multiple 401(k) Retirement Accounts
In this section, we’ll explore some examples of individuals successfully managing multiple 401(k) retirement savings accounts. While these examples may not cover every possible situation, they can serve as a starting point and inspiration for readers considering this option.
Example 1: Juggling Multiple Jobs with Different 401(k) Plans
Imagine an individual working multiple jobs, and each current employer offers a different 401(k) plan. This person successfully managed their accounts by keeping track of contribution limits, taking advantage of employer matches, and maintaining a diversified portfolio across all accounts.
By cross-referencing their various accounts, contributions during each pay period, and types of investment options, they stay organized and make the most of employer contributions while splitting their investments across 401(k) plans.
Example 2: Self-Employed Individual with a Solo 401(k) and a Traditional 401(k)
Consider a self-employed individual with a solo 401(k) and a traditional 401(k) from a previous employer. This individual managed their accounts by carefully considering investment options, consolidating accounts when appropriate, and working with a financial advisor to ensure optimal asset allocation and risk management. They are making the most of profit-sharing plans and higher contributions in their solo 401(k).
Remember that when you stop working for a company, you stop getting employer contributions, and you’re no longer able to contribute to your previous employer’s 401(k) plan. This is one of the reasons many people consider rolling over their 401(k) to an IRA of their choosing.
Example 3: Couple Coordinating Their Retirement Savings
Think about a married couple with their own 401(k) accounts from different employers. The couple manages their multiple accounts by coordinating their investment strategies, regularly reviewing their combined retirement savings, and making necessary adjustments to ensure they stay on track to meet their retirement goals as a joint unit.
Example 4: Transitioning Between Employers and Managing Old and New 401(k) Accounts
In this scenario, an individual transitions between jobs and must decide whether to roll over their old 401(k) account into their new employer’s plan or keep it separate. This person weighed the pros and cons of each option, took into account investment options and fees, and ultimately made an informed decision that aligned with their retirement goals.
If they choose to execute a rollover, they may decide to contact their plan administrator and begin a direct rollover into either a new 401(k) or an Individual Retirement Account like a SEP-IRA (if they’re self-employed), a Simple IRA, a Roth IRA, or a traditional IRA.
Tips for Managing Multiple 401(k) Accounts Effectively
While managing multiple accounts can be complex, it can also bring benefits that help you save for retirement. In that situation, it’s important to be diligent with your financial planning to ensure a secure retirement savings arrangement.
Here are some key tips to follow when managing multiple accounts.
Consolidating Accounts and Rollovers
Consider consolidating multiple 401(k) accounts by rolling over balances to a single account, such as a new employer’s plan or an IRA. This can open up options for simplified account oversight, lower fees, and/or expanded investment options. Explore after-tax Roth IRAs and Roth 401(k)s, or tax-deferred traditional IRAs and traditional 401(k)s.
Regularly Monitoring and Rebalancing
Regularly monitor the performance of your investments across all 401(k) accounts and rebalance portfolios as needed to maintain a desired asset allocation and portfolio diversification. This can help manage risk and optimize returns.
Staying Informed About Contribution Limits and Rules
Stay informed about current IRS rules and contribution limits for multiple 401(k) accounts to avoid over-contributing and incurring penalties. Each tax year, the IRS outlines total contribution limits that apply to each account holder, which represents the total investment allowed in all of your 401(k) accounts combined.
The SECURE Act and its successor, SECURE 2.0, provided recent updates to these limits.
Seeking Professional Advice
Consult a financial advisor for guidance on managing multiple 401(k) accounts, optimizing investment strategies, staying within contribution limits, and making the most of your tax advantages.
Making the Most of Your 401(k) Accounts
There are benefits and drawbacks to having multiple 401(k) accounts. At times, you may be able to make the most of employer contributions and/or solo 401(k) contributions. In contrast, you may find it challenging to manage plan contribution limits and portfolio diversification.
Whatever you choose, it’s essential to stay informed about contribution limits, regularly rebalance your investments, and monitor your retirement savings performance.
If you want to complete a rollover, partner with a trusted professional to make informed decisions about your 401(k) accounts. Consider working with Capitalize to get the guidance and support you need to find and consolidate your old 401(k) plans.
