What is a 401k Plan?
A 401(k) Plan is the most popular type of retirement plan private sector companies offer. It is a qualified employer-sponsored retirement plan where an employee can make contributions from his or her paycheck either before or after-tax, depending on the options offered in the plan. The contributions go into a 401(k) account, with the employee often choosing the investments based on options provided under the plan. Employers offering a 401(k) plan may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Simple and safe harbor 401(k) plans have mandatory employer contributions.
Are multiple 401k accounts allowable?
The answer is in affirmative, you can have multiple accounts at a time. You can have both a Roth and Traditional IRA and you can contribute to both in the same tax year. If you work multiple jobs, then you might be offered several plans from more than one employer simultaneously. You could be working as an employee and either as an independent contractor or a consultant at the same time.
It is important to remember that you cannot contribute more than the maximum contribution limit across allowable by the Internal Revenue Services all accounts for a given year. The contribution is dependent on your income level, the maximum is $18,500 (if you are 50 years old or over its $24,500) to all of your 401k no matter how many unrelated employers you have. You can split up $18,500 to accommodate the several 401k accounts.
Employer contribution limits are determined on a per employer basis and have no effect on contributions made by the employers. Therefore, if you work for yourself and for another employer, the employer contributions made to your Solo 401k stemming from self-employment will have no effect on the number of employer contributions you day-time job make to the 401k sponsored by the day-time employer.
For the 2016 tax year, you may defer up to $18,000 of your pay into the plan. If you have several plans, the limit applies to your total elective deferrals. Elective deferrals are amounts contributed by the employer to a plan at the employee's election. This includes deferrals under a 401(k), 403(b), SARSEP and SIMPLE IRA plan.
For instance, you can choose to contribute $13,000 to your employer’s 401k plan, so only have $5,000 limit to contribute on the other plans you participate. If you are 50 years old or above, a $6,000 additional is allowed in a catch-up 401k contributions or a total of $24,000.
The limit mentioned above does not include any employer matching or nonelective contributions. The maximum limit including elective and employer contributions is $55,000 per 401k plan, $59,000 for individuals over 50 years old. You can contribute to the maximum of $18,000 for the elective deferral of your primary employer.
For an unrelated employer, IRS allows you to put up a total of $55,000 per year into a 401k. This includes both the employee and employer’s contributions. If you work for two businesses which have no legal overlap or affiliated relationship, you may contribute to two retirement plans. You can literally double your contributions or $55,000 per job (or a total of $110,000 contributions for each year). Some businesses have a profit-sharing plan which means that contribution plan under which the plan may provide, or at the employer’s determination, how much will be contributed to the plan annually either out of profits or not.
Advantage and Disadvantage
Generally, having access to multiple 401k accounts is not a usual situation for a common American. The retirement contributions can help you shelter your income, the money you put away can help you reduce your tax bill. Certainly, fewer accounts are easier to manage. For most people, consolidation of retirement accounts is the best plan for it is easier to manage asset allocation, fees, withdrawals, taxes, paper works, account questions and transferring of assets to beneficiaries.
If you opt to have more than one job to acquire this retirement benefit, make sure that you are responsible enough to keep track this of your plans. Once you leave an employer, you must keep your former employer updated with your current mailing address or email. When a plan administrator loses track of a participant, he may transfer the search costs and applicable penalty fees to the participant. In this industry, there is no standard on what constitutes a “good faith effort” to locate a participant. So, some plans may give up the search sooner than others.
Lastly, you should be monitoring your 401(k)s’ performance every month for this will be much more difficult to remember to do if you have multiple to keep track of.