The Internal Revenue Service doesn't restrict you to just one 401(k) plan at a time. If you're lucky enough to work for two employers who both offer 401(k) plans, you can take advantage of both plans. However, knowing how the contribution limits apply to both your deferrals and your employer's matches helps you make sure you don't get hit with extra tax penalties because you contributed too much.
Elective Deferral Limits
The limits on how much can go into your 401(k) plans each year doesn't change whether you have one, two or 10 401(k) plans at the same time. As of 2012, the maximum elective deferral limit is $17,000. For example, if you contribute $10,000 to your first 401(k) plan, you can't defer more than $7,000 into your second 401(k). You are responsible for tracking your contributions to all your 401(k) plans to make sure you don't go over the contribution limits.
Overall Contribution Limits
In addition to limits on your deferrals, the IRS limits the total of your contributions plus your employer's contributions each year. As of 2012, the total can't exceed $50,000. For example, if you have two very generous employers and one of your employers puts in $30,000 to your first 401(k) and your second employer puts in $20,000, you've reached your limit so you can't defer any more of your salary into the plan.
Excess Contribution Consequences
If you go over the annual deferral limits and don't correct the excess contribution, you have to pay taxes on the excess twice: once when the money goes in and a second time when you take distributions. For example, if you contribute $3,000 extra during the year to your 401(k) plans, you have to include that $3,000 as taxable income on your tax return. Then, when you withdraw that $3,000 at retirement, the money is taxed again because excess contributions don't create a basis in your 401(k) plan. To avoid this penalty, you must withdraw any excess contributions by your tax-filing deadline. As long as you're correcting an excess contribution, the distribution isn't subject to the 10 percent early withdrawal penalty.
Advantages of Two Plans
Having 401(k) multiple plans offers multiple benefits. First, you can have more investment options for your contributions. For example, if one company's growth fund is more attractive, but you prefer the second company's foreign stock fund, you can split your contributions between the two plans. Also, the IRS permits plans to impose lower contribution limits than the IRS maximums. Being able to contribute to two 401(k) plans allows you to use the full IRS limits. For example, if the annual contribution limit is $17,000 and both of your plans limit contributions to $10,000 each year, you could contribute $8,500 to both plans and be in compliance with the plan rules and the IRS rules.
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