The 401(k) is one of the most popular employer-sponsored retirement plans. If you've worked for a medium-to-large company at any time, you've likely been offered the chance to participate in a 401(k). But, what happens if you leave your job after you've been contributing to a 401(k) plan? Can you have two 401(k) plans at the same time? Or, what if you stay at your job and your employer hires a new 401(k) administrator. Can an employer have two 401(k) plans? The short answer is that yes, you can have two 401(k) plans at the same time. However, there are numerous IRS restrictions that you should be aware of before you contribute to two plans.
TL;DR (Too Long; Didn't Read)
You can have as many 401(k) plans as you like; however, there are IRS restrictions on total contributions.
Leaving an Employer
The most common way to end up with two or more 401(k) plans is if you leave your employer. In many cases, employers allow departing employees to continue to invest in a company 401(k) plan. If you move to a new employer with a 401(k) plan, you may be invited to participate in that plan as well. The bad news, if your former employer had a good 401(k) plan, is that you may not be able to contribute to that plan any longer since 401(k) contributions are typically funded with payroll deductions. However, you can usually still maintain your old 401(k) while you participate in a new one as well.
When making contributions, you'll have to be aware of the overall IRS limit on 401(k) elective contributions, which are ones employers make of their own volition out of their paycheck. For the tax year 2019, the elective contribution limit is $19,000. If you're age 50 or over, the IRS allows an additional "catch-up" contribution of $6,000, bringing your total elective contribution limit to $25,000 for 2019. These limits apply to your total contributions to all of your 401(k) plans. So, if you have two 401(k) plans and contribute $18,000 to one, you can only contribute an additional $1,000 to your other plan or an additional $7,000 if you are age 50 or older.
SEP-IRA and 401(k)
If you start your own company, you might be eligible to open a number of different types of retirement plans. One popular option is a SEP-IRA or Simplified Employee Pension. A SEP-IRA is the same as a traditional IRA for investment, distribution and rollover rules, but the contribution limits are much higher. For the tax year 2019, you can contribute the lesser of 25 percent of an employee's compensation or $56,000. These plans can get expensive if you have employees, as you're required to contribute the same percentage of income for every qualifying employee. However, if you're self-employed, a SEP can be a good way to maximize your retirement contributions.
If you're wondering, "Can I have a SEP and a 401(k)?" the answer is yes. If you've got a leftover 401(k) plan from a previous job, you can still maintain that plan while opening a SEP-IRA, and you can even continue making contributions if your former employer allows it. You can even open a new 401(k) plan for your company, or a solo 401(k) plan if you are a sole proprietor.
Total Plan Contribution Limits
To help increase the participation rate and overall attractiveness of a 401(k) plan, many employers make matching contributions to employee accounts. An employer match is usually based on a percentage of the amount that an employee is already contributing; for example, an employer might match 50 percent of the first 6 percent of salary that an employee contributes. For an employee earning $100,000, this means the employee's elective contribution would be $6,000, and the employer would contribute an additional $3,000, for a total of $9,000.
The $19,000 elective contribution limit to 401(k) plans for the tax year 2019 does not include employer contributions. Under the above example, if the employee instead made $19,000 in elective contributions, the employer's matching contribution of $6,000 would still be allowed. The total amount of contributions that can be made to a 401(k) for the tax year 2019 is $56,000. This includes employee elective contributions, employer contributions and any other deposits, such as forfeitures. Forfeitures are amounts that are given up by departing employees that are not yet vested; these are distributed back into the plan.
Keeping an Old 401(k)?
Whether or not you should keep an old 401(k) is a personal decision that will depend on many factors. First and foremost, you'll have to make sure that you are allowed to keep an old 401(k). Although many employers maintain 401(k) accounts for ex-employees, some do not. In that case, once you leave a firm, you'll be required to move your money elsewhere.
Another consideration is performance. When you sign up for a company's 401(k) plan, you're stuck with whatever investments that individual plan provides. Some employers have outstanding 401(k) options, with the very best-performing mutual funds and investments available. Others have a limited roster of 401(k) choices, including perhaps a conservative option, an aggressive option and a middle-of-the-road choice. When you move to a new firm or start your own plan, compare your new investment options with the ones in your old 401(k). Do the new investments better suit your goals and risk tolerance? Which 401(k) offers better-performing investment options?
Don't forget to consider costs when you're comparing 401(k) plans. Over time, higher annual expenses can eat into a mutual fund's total return. Cost should not be your only consideration, all other things being equal, you're generally better off taking a lower-cost option over a high-cost option. Although most employers take care of the general and administrative expenses of a 401(k) plan on behalf of employees, check to make sure that you aren't being saddled with any additional fees beyond the cost of your investments.
Lastly, remember to look at the additional features a plan might offer beyond the costs and performance of its individual investments. For example, some plans might offer loans against a 401(k) balance, while others may not.
How Many 401(k)s Can I Have?
The bottom line is that you can have a theoretically infinite number of 401(k) plans. There are no IRS restrictions on the number of plans you can have, just on the amount that can be contributed to each plan. Practically speaking, however, it can be an administrative headache to have too many 401(k) plans.
For starters, you're more likely to miss important notices if you have numerous 401(k) plans strung across the universe. You might also simply lose track of where you have all your money. Additionally, the more spread out your investments are, the more difficult it becomes to manage them as a unified whole. If you're trying to diversify your portfolio properly and you forget that you have a $6,000 401(k) completely invested in one company stock, for example, it can throw your whole allocation out of whack.
Can you have more than one 401(k)? Certainly. Should you? That's a question only an individual investor can answer after analyzing costs, convenience, performance and administrative factors.
John Csiszar served as a financial adviser for over 18 years, both for a global wirehouse and at his own investment advisory firm, earning a Certified Financial Planner designation along the way. He now works as a writing and editing contractor for private clients, with thousands of online articles to his credit, along with five educational books written for young adults.