There is no rule against having more than one 401(k) account. For people with a regular job that pays wages as well as a self-employment gig, it can make sense. However, the IRS restricts the total amount that can be contributed to multiple 401(k) accounts. So it pays to be aware of these limitations if you have more than one 410(k). It’s easy to find a financial advisor to help you with retirement planning if you use SmartAsset’s matching tool.
401(k) Basics
A 401(k) account is a feature of many employer-sponsored retirement savings plans. Named for a section of the tax code, it offers tax advantages to retirement savers by letting them divert part of their pay into a retirement investing account before paying income taxes on the money.
Employers can also contribute to the accounts pre-tax. And earnings from an investment portfolio made through 401(k) plans grow tax-free as well. Employees can’t take money from the accounts until age 59.5 without owing income taxes as well as a 10% early withdrawal penalty. After that age, they can withdraw owing only income taxes at their current tax rate.
Most workers have only one 401(k). However, those who change jobs may wind up with multiple 401(k) plans. Also, people who work for employers that report wages and salary on W-2 forms may also be self-employed on the side as independent contractors whose earnings are reported using Form 1099.
While the IRS limits total tax-deferred contributions to 401(k) and some other retirement plans, you can still contribute to certain other types of retirement accounts even after maxing out 401(k) contributions. For instance, if you have an IRA, you don’t have to apply contributions to it to total allowable 401(k) contributions.
Most employees who change jobs either roll over an existing 401(k) into a 401(k) with their new employer or into an IRA. However, if fees in the new 401(k) are higher, or investment options are more limited, they may prefer to leave the funds in the old 401(k). Over the course of a career, this can lead to an active job-switcher having several 401(k) accounts.
Salary Contribution Limits
The main limitation on having more than one 410(k) is the cap on contributions. The IRS limits the amount that can be contributed to certain tax-deferred plans including 401(k)s. And these limits apply to 401(k) plans in the aggregate. That is, retirement savers can’t defer the maximum in one plan, then do the same in another. For 2022, the annual employee contribution limit for 401(k) accounts is $20,500. Employees over 50 can contribute an additional catch-up contribution of $6,500 for a total of $27,000. These limits apply to all the 401(k) plans an employee owns.
For example, if an employee under age 50 contributes $20,500 to a 401(k) plan with a current employer, the employee cannot defer any salary to a 401(k) set up for a self-employed side business. However, it’s possible to mix and match. That is, if the employee contributes $15,000 to the employer 401(k), the employee can contribute $4,500 to the self-employment 401(k).
In addition to limits on employee contribution, there are limits to how much employers can contribute to 401(k) accounts. For 2022 the combined contributions to any 401(k) by an employer and an employee under age 50 cannot total more than $61,000, or $67,500 for an employee over 50.
However, employer contributions are not considered in aggregate as employee contributions are. That is, a taxpayer under age 50 with separate 401(k) accounts for a regular job and side business who directs the maximum $20,500 in aggregate contributions to either 401(k) can still receive $40,500 in employer contributions to each 401(k).
These limits on aggregate contributions apply not only to 401(k) accounts. They also include some other types of accounts, including 403(b), SIMPLE IRA, SIMPLE 401(k) and SARSEP plans.
Cons of Multiple 401(k)s
Having more than 401(k) account increases the paperwork of saving for retirement, as savers have to keep track of the account statements and other documentation. It can be simpler and easier to develop an investment strategy where all 401(k) accounts are combined into one.
Each 401(k) account also has fees for administration and other costs associated with it. To the extent these fees could be eliminated by combining 401(k) accounts, it may make sense and improve investment returns by putting all retirement funds into one account.
Bottom Line
It is legally permissible to have more than one 401(k) account and employees who switch jobs frequently or are self-employed on the side may find themselves in this situation. While most job-switchers roll over 401(k)s into a new employer’s plan, it can be desirable to keep the old one if it has lower fees or more investment options. Having multiple 401(k) plans doesn’t change the cap on total annual tax-deferred contributions to the plans, however, and it can increase the burden of paperwork and fees.
Tips on Retirement Planning
- A financial advisor can help you account for tax rules and other considerations when creating a financial plan. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use the SmartAsset 401(k) calculator to get a quick estimate of what your 401(k) will be worth over time.
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