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How do 401(k) Accounts Work?
A 401(k) account is an employer-sponsored retirement plan that they offer to their employees. Using a 401(k), employees can contribute some of their wages to start setting money aside for retirement. These accounts are tax-advantaged and tax-sheltered, making them an essential part of anyone’s retirement plan.
To help get employees to contribute to their 401(k) accounts and start saving for retirement, many employers offer a 401(k) match. This match is typically a percentage of your wages that the employer will match your 401(k) contributions on. They will then add the extra money straight to the account. So since a 401(k) match is basically free money, it’s important to use the 401(k) to your advantage and to understand how they work.
Can I Have Multiple 401(k) Accounts?
Before we go into too much detail, the short answer to this question is yes. You can have multiple 401(k) accounts at the same time. The longer answer will of course also be yes, but let’s take a little deeper look into the possibility of having multiple 401(k) accounts.
As employer-sponsored retirement plans, your 401(k) is tied to the job that you have when you open it. This means that if you switch jobs and you don’t roll your old 401(k) into your new one, you would then have a second 401(k) at the new job. And so on and so on. So not only is it possible to have two 401(k) accounts, many people actually have several accounts since they open up a new one at each new job that you have.
Not only is it possible to have multiple 401(k) accounts from switching jobs, but you can also have a second one if you are self-employed outside of your current job and have an individual 401(k) that you contribute to that way. So if you have a business on the side and you have it set up to contribute to a 401(k), that would be a totally separate account from the one that you have at your day job.
Can I Max Out More Than One 401(k) Account?
If you switch jobs or open an individual 401(k) account for your personal business, you still have to keep the contribution limits in mind. As of 2021, the IRS defines the maximum amount that you can contribute to all of your 401(k) accounts combined as $19,500. If you’re 50 years old or older, the IRS allows you to contribute an additional $6,500 — for $26,000 total — so that you can “catch up” as you head towards retirement. However, this limit does not include any employee matching that you get.
So you can still contribute the full $19,500 and still get as much of a match from your employer as they offer, as long as the combined contribution from yourself and your employer does not exceed $58,000. For example, if you make $100,000 per year and your employer matches a total of 8% of your annual income, they’d contribute $8,000 extra on top of your contribution. In that case, the total amount getting added to your 401(k) per year would be $27,500.
Also, keep in mind that if you have an individual 401(k) through your own personal business, you can contribute much more to it than the typical $19,500. This is because you are both the employee and the employer in that case, so you’re able to take advantage of the total combined limit of $58,000 per year. To do this, you’ll need to treat the excess contributions as non-elective, similar to what an employer has to do in a typical 401(k) for their employees.
Are There Any Downsides to Having More Than One 401(k)?
While it’s possible to have multiple 401(k) accounts and it’s actually rather common among people who switch jobs, it isn’t always the best idea. Let’s take a look at a few of the reasons that you may not want to leave your old 401(k) accounts open.
You Can Lose Track of One or More 401(k) Accounts
If you’ve switched jobs a couple of times and have a few 401(k) accounts floating around, you may eventually lose track of one or more of the accounts. While that may sound crazy — how can you forget about a retirement account, right? — it happens all the time. Especially if you were only at the company for a short time and only contributed a few hundred dollars to the account, you may totally forget about it as you move on.
Not only is it possible to forget about old, smaller 401(k) accounts, but it’s also harder for the plan administrator to keep in contact with you. When you separate from a company, it’s your responsibility to provide updated contact information to your retirement plan administrators. If you do not keep them informed on how to contact you, they may be unable to send important statements, notices, etc.
Do You Have to Pay Extra Fees for Multiple 401(k) Accounts?
Although 401(k) accounts are employer-sponsored retirement plans, they are not entirely free for you to use. Some plans will be more expensive than others, and the more accounts that you have open, the more vulnerable you are to paying additional fees on your investments.
For example, one of your old 401(k) accounts might charge you 0.5% interest every year in a certain index fund or mutual fund that you’re invested in. At your new job, you notice that the fee for nearly the same index fund is only 0.25%. In this case, the money in your old 401(k) is costing you twice as much to leave it there.
What Happens With Company Stock in an Old 401(k) and They Go Bankrupt?
Thankfully, companies are required to keep 401(k) funds separate from their assets. So in the case of bankruptcy or other financial collapses, employees would still have access to the money in their 401(k). However, this is not true if the 401(k) contains company stock and that company subsequently goes out of business.
Many businesses offer shares of company stock as their way of matching 401(k) contributions. Which is great as long as the company is doing well financially and continuing to grow. But if the company goes bankrupt, the value of its stock plummets all the way to zero. So if you have an old 401(k) with company stock, keep that in mind. It might be in your best interest to sell the shares back to the company and roll the funds over into your new 401(k) to mitigate that risk.
Why Would I Want to Have More Than One 401(k)?
Having multiple 401(k) accounts is typically not a bad thing, but as you just learned, there are some things to keep in mind if you’re in that position. So then that brings up the question of why anyone would want to have more than one 401(k) account open at a time.
Often, the biggest reason for this is just because it’s easier than going through the process of rolling it over into your new 401(k). And as long as you keep up with your accounts and keep track of them, it’s no big deal to have more than one. It also gives a bit more diversity to your investment options. Since the options in a 401(k) are usually pretty limited, it can be nice to have a bit more freedom to invest differently between your 401(k) plans.
Lastly, as discussed above, having an individual 401(k) for your business income in conjunction with an employer-sponsored 401(k) is a great way to set aside as much as possible. With these two accounts, you can contribute as much as necessary to your employer-sponsored 401(k) to get the maximum match from them. On top of that, you can contribute the remaining difference — $58,000 minus what you contributed to your normal 401(k) — to your individual 401(k) and watch your retirement savings skyrocket.