Should I Really Have 2 401(k) Plans? – Avoid This Mistake + FAQs

If you’ve switched jobs a few times, you’re not alone.

The average American holds about 12 jobs in a lifetime, which often means juggling more than one retirement account.

Roughly 24 million “forgotten” 401(k) accounts holding over $1.3 trillion have been left behind by job changers. These staggering numbers might have you wondering if keeping multiple 401(k) plans is a smart move or a recipe for confusion.

Before diving in, here’s what you’ll learn in this comprehensive guide:

• Maximizing Benefits: How having two 401(k) plans can boost your retirement savings (and when it won’t).
• IRS Rules & Limits: The crucial IRS regulations on contribution limits for multiple 401(k)s and how to avoid costly tax mistakes.
• Tax Diversification: Why using both a Traditional and Roth 401(k) can be a powerful tax strategy for long-term gains.
• Career Considerations: Tailored advice for job hoppers, high earners, and self-employed individuals managing more than one 401(k).
• Pros & Cons: A clear breakdown of the advantages and disadvantages of maintaining two 401(k) accounts, plus answers to the most frequently asked questions.

Direct Answer: Should You Have Two 401(k) Plans?

Should you maintain two 401(k) plans at once? The direct answer is that it’s possible and often permissible to have two 401(k) accounts, but whether you should depends on your situation.

There’s no law against having multiple 401(k)s – many people accumulate them by changing jobs or by contributing to both Traditional and Roth 401(k) options.

Having two 401(k) plans can be beneficial if you take advantage of what each offers. For example, you might keep an old 401(k) from a previous employer because it has excellent low-cost investment options, while also contributing to your new employer’s 401(k) to get the company match.

Or you might simultaneously contribute to a Traditional 401(k) (pre-tax) and a Roth 401(k) (after-tax) within one employer’s plan to diversify your tax outcomes in retirement. In these cases, two accounts can work in your favor.

However, managing two 401(k)s also means double the responsibility. You must ensure you don’t violate IRS contribution limits by spreading your contributions across accounts.

You also have to keep track of multiple statements, fees, and investment choices. If mishandled, multiple 401(k)s can lead to overlooked accounts or even excess contributions that trigger tax penalties.

In short, you can have two 401(k) plans, and doing so can offer extra savings and flexibility – but it requires careful attention to rules and good financial housekeeping to truly pay off.

Avoid These Mistakes with Two 401(k) Plans

Managing more than one 401(k) plan can open doors to greater savings, but it also opens up some pitfalls. Here are common mistakes to avoid when you have two 401(k) accounts:

• 🚫 Exceeding the Contribution Limit: The IRS sets an annual cap on how much you can contribute to 401(k) plans in total. If you have two plans, your combined employee contributions cannot exceed $22,500 (for 2023; $23,000 for 2024). Overlooking this and contributing the max to each plan could result in an excess contribution. The fix isn’t fun – you’d need to withdraw the extra money and any earnings on it by tax time or face double taxation on that amount. Always track your contributions across all plans to stay within the legal limit.

• Forgetting Old Accounts: It’s easy to lose track of a 401(k) from a previous job. Forgotten 401(k)s might be sitting in costly investments or getting eaten by fees. They could even be moved into an IRA or to state unclaimed property if the plan can’t find you. Avoid this by keeping your contact information updated on all accounts and consolidating or rolling over accounts when it makes sense. Out of sight, out of mind can hurt your retirement nest egg.

• Missing Out on Employer Match: If you’re contributing to two 401(k)s simultaneously (say, two jobs or one job plus a side-business solo 401(k)), plan your contributions to capture any available employer match in each plan. One mistake is to focus on maxing out one plan while neglecting the free money in the other. Ensure you contribute at least enough in each account to get the full employer match, if offered – that’s essentially free money you don’t want to leave on the table.

• Duplication in Investments: Having two accounts means you might inadvertently invest in very similar funds in both, leading to a less diversified portfolio than you think. For example, if both 401(k)s default you into a target-date fund, you could end up overweight in the same strategy across accounts. Take a holistic view of your investments. Treat all your 401(k)s as pieces of one big portfolio to balance your asset allocation. This way you don’t double up on risk or miss out on diversification opportunities.

• Paying Unnecessary Fees: Every 401(k) plan has its own fee structure. You might be paying two sets of administrative fees or higher fund expenses in one account versus the other. If one of your 401(k) plans has significantly higher costs or poorer investment choices, consider moving that money into the better plan (or into an IRA) to save on fees. Don’t let inertia lock you into an expensive, underperforming plan.

• Neglecting Required Minimum Distributions (RMDs): Later on, if you have multiple 401(k)s in retirement, remember that required minimum distributions must be calculated and taken from each 401(k) separately once you hit the RMD age (currently 73 for most retirees). Unlike IRAs, you cannot take the total RMD from just one 401(k). A common mistake is forgetting one account’s RMD, which can lead to steep penalties. Keeping track of RMDs is another good reason to consolidate accounts before reaching that age, unless you’re still working for the company that sponsors a particular 401(k).

By sidestepping these mistakes, you’ll ensure that having two 401(k) plans remains a benefit to your retirement strategy rather than a hindrance.

Key Terms You Need to Know

Understanding a few key terms will help you navigate the nuances of multiple 401(k) plans. Here’s a quick glossary:

• 401(k) Plan: An employer-sponsored retirement savings plan that lets you contribute part of your paycheck into investments before taxes (Traditional 401(k)) or after taxes (Roth 401(k)). Employers often match a portion of your contributions.

• Traditional 401(k): A 401(k) account funded with pre-tax dollars. Contributions reduce your taxable income today, and the money grows tax-deferred. You’ll pay income tax on withdrawals in retirement.

• Roth 401(k): A 401(k) account funded with after-tax dollars. There’s no upfront tax break, but your contributions and earnings can be withdrawn tax-free in retirement (as long as you’re 59½ and the account is at least 5 years old). Many employers offer both Roth and Traditional options within the same 401(k) plan.

• Elective Deferral Limit: The maximum amount you, as an employee, can contribute across all your 401(k) plans in a year. (For example, $22,500 total in 2023, or $30,000 if you’re 50+). Having multiple plans doesn’t raise this personal limit – it’s a combined cap for your contributions.

• Employer Match: The contribution your employer adds to your 401(k) on your behalf, typically based on how much you contribute. For instance, a common match is 50% of your contributions up to 6% of your salary. Each employer’s match is tied to its own plan – if you have two jobs with 401(k)s, you could receive two separate matches. (Employer contributions do not count against your $22,500 personal limit, but they do count toward another limit; see “Annual Addition Limit.”)

• Annual Addition Limit: Also known as the Section 415 limit, this is the total amount that can go into a 401(k) plan in a year from all sources – including your contributions, employer match, profit-sharing, etc. In 2023, this overall limit is $66,000 per employer plan (or $73,500 if you’re over 50 and including catch-up contributions). If you have two unrelated employers, each 401(k) plan has its own $66k limit for combined contributions. This means having two jobs could potentially allow you to get more total dollars saved (especially via employer contributions) than you could with one 401(k) alone.

• Rollover: Moving money from one retirement account to another, typically when you change jobs. You can roll over an old 401(k) into your new employer’s 401(k) or into an IRA. Rollovers can be done directly (trustee-to-trustee, avoiding taxes) or indirectly (you take a distribution and reinvest it within 60 days). If you have multiple 401(k)s lying around, a rollover is a common way to consolidate them.

• Solo 401(k): A 401(k) plan designed for a self-employed individual or business owner with no employees (other than possibly a spouse). If you’re self-employed and also work for an employer, you can have a solo 401(k) for your business and a regular 401(k) at your job. This allows additional contributions through your business profits, on top of what you contribute at work.

• Vesting: The process by which you earn ownership of employer contributions in your 401(k). If you leave a job before being 100% vested, you might forfeit some or all of the employer match money. When managing multiple 401(k)s due to job changes, pay attention to vesting schedules – it might influence whether you leave money in a plan or roll it over, especially if some of it isn’t yours to keep yet.

Examples of Two 401(k) Scenarios That Work Best

Certain scenarios make having two 401(k) plans especially advantageous. Below are some real-world examples where maintaining multiple 401(k)s can work in your favor:

In each of these scenarios, having two 401(k)s is not only acceptable but actually beneficial. The key is being intentional: use each account to its fullest advantage. Whether it’s getting every last dollar of employer match, leveraging unique investment choices, or balancing tax strategies, these examples show how two 401(k) plans can complement each other.

The Tax Strategy That Maximizes Your 401(k) Gains

When it comes to taxes, having two 401(k) plans can open additional strategies that a single account might not. The goal is to maximize what you keep after taxes. Here are four tactics to consider:

1. Tax Diversification (Traditional + Roth): Split contributions between a Traditional 401(k) and a Roth 401(k) to hedge against future tax changes. By having both pre-tax and after-tax savings, you get a tax break now on the traditional portion and tax-free withdrawals later from the Roth portion. In retirement, this mix gives you flexibility to manage your taxable income and potentially reduce your lifetime tax bill.

2. Maximize Total Contribution Space: Use a second 401(k) (like a side gig’s solo 401(k)) to contribute beyond the single-plan limits. Your personal deferral limit is shared, but each plan has its own overall contribution cap. For example, you might max out $22,500 in your employer’s 401(k), then use a solo 401(k) to add employer/profit-sharing contributions from your business income. This shelters more money from taxes now and lets it grow tax-deferred, boosting your retirement stash.

3. Avoid Tax Pitfalls: Be diligent to prevent costly mistakes. Don’t contribute above the allowed combined limit across plans, or you’ll face double taxation on the excess. Plan for required minimum distributions (RMDs) as well – consolidating accounts before RMD age or rolling a 401(k) into an IRA can simplify withdrawals. Remember, Roth 401(k)s no longer have RMDs starting in 2024, which can help keep your taxable income lower in retirement.

4. State Tax and Early Access: Consider your state tax situation. If you live in a high-tax state now but plan to retire in a no-tax state later, prioritizing Traditional 401(k) contributions could save on state taxes. Conversely, if you expect higher tax rates later, putting more into Roth 401(k) now might be smarter.
   Also, if you leave one employer at age 55 or above, that 401(k) can be accessed without a 10% early withdrawal penalty (the Rule of 55). With multiple 401(k)s, you could tap one account early under this rule while leaving others untouched, which is helpful if you phase into retirement.

Comparing Two 401(k) Plans vs. One

Is it better to consolidate into one 401(k) or maintain two? The answer hinges on personal preference and plan quality. Let’s compare having two 401(k) plans versus one:

• Simplicity vs. Flexibility: One account is easier to manage (one statement, one set of choices). Two accounts offer more investment options and plan features, but require more effort to track.

• Contribution Logistics: With one plan, you direct all contributions to a single account and you’re done. With two plans (say you changed jobs mid-year or work two jobs), you need to decide how to split your contributions. You might contribute to one up to the match, then switch to the other. It’s an extra step of coordination that you avoid with a single account.

• Fees and Expenses: Check each plan’s fees. If one 401(k) has much higher costs, consider consolidating into the lower-fee plan or an IRA to save on expenses. One well-managed 401(k) could be cheaper than juggling two if one of them has high fees.

• Risk Management: This might sound counterintuitive, but having two 401(k) plans can spread certain risks. For instance, if one plan undergoes changes (like a fund lineup change or a temporary freeze during a recordkeeper switch), your other 401(k) is unaffected and still fully at your disposal. Also, in the rare event of administrative errors in one plan, you have another account not caught in that issue. All 401(k) plans are governed by similar protections, so it’s not about one plan “failing” – it’s more about operational hiccups or access at any given time.

• Consolidation Trade-offs: Rolling a 401(k) into an IRA can reduce some benefits of employer plans (like strong creditor protection or the ability to delay RMDs if you’re still working at that employer). Keeping money in a 401(k) preserves those perks. Many people eventually roll old 401(k)s into a current plan or an IRA for ease of management, but consider what you might lose or gain by consolidating. For example, 401(k) assets are generally shielded from creditors and don’t count in certain means tests, whereas IRA protections can be different.

In essence, one 401(k) offers simplicity and fewer moving parts, which is great for organization. Two 401(k)s offer more options and the ability to leverage each plan’s strengths.

A lot depends on how good each plan is – if one is clearly superior (lower fees, better investments), merging into it might be wise. If both are decent, you might keep both until there’s a convenient time to combine.

Regularly reviewing both accounts will help you decide if the added complexity of two plans is paying off for you or if it’s time to streamline.

How IRS Rules Affect Multiple 401(k)s

The IRS doesn’t mind you having multiple 401(k) accounts, but they do care that you follow the rules. Here’s how key IRS regulations come into play when you have more than one 401(k):

• One Salary Deferral Limit: The IRS considers all your 401(k) and similar plans together for the purpose of employee contributions. For 2023, you can contribute up to $22,500 as an employee ($30,000 if age 50+). Whether you put that in one plan or split it between two, the sum of your contributions cannot exceed the limit. For example, if you contributed $15,000 to your old employer’s 401(k) earlier in the year and then switched jobs, the most you could contribute to the new employer’s 401(k) is $7,500 more in that year. It’s on you, the individual, to ensure you don’t go over the limit because each plan separately won’t know what you did in the other.

• Excess Contribution Consequences: What if you accidentally put in too much across two plans? The IRS requires that excess deferrals be removed by April 15 of the following year. If not corrected in time, the excess is effectively taxed twice (once when contributed, once when eventually withdrawn). You’ll also owe taxes on any earnings that came from the excess when they’re withdrawn. In short, violating the combined limit can hurt – but as long as you catch it and withdraw the extra promptly, you can fix the mistake without long-term penalty (aside from the extra taxes on that amount).

• Employer Contributions Are Separate: The good news for multiple-401(k) holders is that the limit on total contributions (your deferrals + employer contributions) is applied per plan. This means each unrelated employer can contribute up to the max for their plan without regard to what the other employer is doing. So if you have two jobs with 401(k)s, each plan could potentially receive the full employer match or profit-sharing up to its own $66k cap. There’s a caveat: if you own or control both businesses (say you have a side company), the IRS might consider those one employer under “controlled group” rules, which would combine limits. But for the typical case of two completely separate employers, each 401(k) gets its own bucket of employer contributions.

• Multiple Plan Distribution Rules: Each 401(k) plan has its own rules for withdrawals, loans, and hardships, all of which must comply with IRS guidelines. If you have two plans, you need to adhere to each plan’s procedures separately. A loan or hardship withdrawal from one 401(k) doesn’t carry over to the other. For instance, you could potentially take a loan from each 401(k) (if both plans allow loans) because the IRS loan limit (typically up to $50,000 or 50% of the balance) is per plan. Just be careful – loans must be paid back to each respective plan, and if you leave the job associated with one account, that loan could become due or taxable for that plan.

• Required Minimum Distributions: Once you hit the RMD age (73 for those born 1951-1958, gradually rising to 75 for younger folks under recent law), the IRS requires you to start pulling money out of 401(k) accounts each year. If you have multiple 401(k)s and you’re retired (no longer with those employers), you must calculate each account’s RMD separately and withdraw at least that amount from each account. You can’t aggregate RMDs across 401(k)s the way you can with traditional IRAs. One exception: if you’re still working for an employer and don’t own more than 5% of the company, you can delay RMDs from that current employer’s 401(k) until you retire. But any other 401(k)s from past jobs would still require RMDs on schedule. Failing to take the full RMD from each plan can result in a hefty excise tax (though new rules have reduced the penalty and allowed corrections, it’s still something to avoid).

In summary, IRS rules ensure that having two 401(k) plans doesn’t give you double the tax-advantaged contribution room for yourself, but it can give you more total savings potential if both employers contribute.

As long as you follow the contribution limits and distribution requirements for each account, you can stay on the right side of the law. Keeping good records (like tallying your contributions from all jobs each year) will make compliance much easier.

What Job Hoppers, High Earners, and the Self-Employed Should Consider

Different career situations call for different strategies when it comes to multiple 401(k) plans. Let’s break down special considerations for job hoppers, high-income earners, and self-employed individuals:

For Frequent Job Hoppers

If you change jobs often, you could end up with a collection of 401(k) accounts from various employers. Each time you leave a job, you typically have a few options: leave the money in the old plan, roll it into your new employer’s plan, roll it into an IRA, or cash it out (cashing out is usually a bad idea due to taxes and penalties). As a serial job hopper, consolidation becomes important.

Having a dozen tiny 401(k)s is a headache to manage and increases the chance you’ll forget one. Consider rolling over each old 401(k) into your new employer’s 401(k) (or into a single IRA) so that you eventually have one or two accounts instead of many.

Also, keep an eye on vesting schedules – if you’re hopping jobs quickly, you might be leaving unvested employer matches behind at each job.

It won’t affect the money you do take (unvested portions are forfeited and never yours), but it’s a reminder to check your statements so you know what portion of the balance was actually yours at departure.

Another tip: if you’re between jobs or thinking of moving on, try not to over-contribute to your 401(k) early in the year. If you max out in the first half of the year at one job and then leave, you can’t contribute further at the next job’s plan that year – and you might miss out on matching dollars at the new employer. Instead, contribute steadily and adjust if a job change happens mid-year.

Finally, as a job hopper, regularly update your address and beneficiary information on all those accounts (or on the rollover destination account).

People who bounce between companies sometimes forget to update records, which can lead to lost accounts or beneficiary issues down the line. Keeping your information current ensures you remain in control of every 401(k) you’ve earned.

For High Earners

High-income individuals often aim to maximize every tax-advantaged opportunity. If you’re a high earner with multiple 401(k) options, you have some unique opportunities and a few potential snags to note.

First, make sure you’re maximizing employer matches in any plan available – leaving free money on the table is a no-go, especially if your income allows you to contribute the max anyway.

Be aware of Highly Compensated Employee (HCE) issues. If you earn above the IRS threshold for HCE status (around $150k+ in recent years) and you’re in a plan where lower-paid coworkers don’t contribute much, your contributions might get capped or partially refunded due to nondiscrimination testing.

This typically affects each plan separately – for example, one job’s 401(k) might return some of your contributions if it fails testing, while your second job’s 401(k) (perhaps a safe harbor plan) isn’t impacted.

To navigate that, some high earners direct more of their savings into the plan that is safe harbor (which automatically passes testing) or into an IRA if one of their 401(k) plans consistently has testing issues.

Another consideration: if your salary is very high, you might bump into the annual addition limit in one plan – especially if your employer gives a generous profit-sharing contribution.

But if you have two separate employers, each plan’s $66,000 limit (2023) is distinct. It’s conceivable for a very high earner to max out total contributions in two plans (though you’d need substantial income and cooperation from both employers).

This is a “good problem” to have, but the key is to leverage it if you can: two plans could allow you to shelter significantly more money tax-advantaged than one plan would.

Lastly, high earners should think carefully about Traditional vs. Roth contributions. If you expect to be in a lower tax bracket in retirement (common for those earning high incomes now), maxing Traditional 401(k) contributions for the tax deduction today might be wise.

However, if you’re younger or foresee high taxes even in retirement (or want to leave tax-free money to heirs), allocating some of your savings to a Roth 401(k) can be valuable. Having two 401(k) plans can let you do both easily – for instance, you might do all Roth in one job’s plan and all Traditional in the other’s, balancing out your tax exposure.

For the Self-Employed

If you’re self-employed (either full-time or as a side hustle), a Solo 401(k) is a powerful tool. It allows you to contribute both as the employee and the employer to your own retirement plan.

For those who are self-employed and working for another employer simultaneously, you can really turbocharge your savings.

Here’s how: your employee contribution limit is still one total across both, but in your solo 401(k) you can contribute an additional amount as the “employer” (roughly 20% of your net self-employment income, up to the plan’s overall limit).

This is on top of any match you get from your regular job’s 401(k). Essentially, the solo 401(k) lets a business owner sock away profits pre-tax, which can be huge for high-earning consultants, freelancers, or side-giggers.

With a solo 401(k), once assets are above a certain amount (currently $250,000), you have to file a Form 5500 each year. It’s a bit of extra paperwork, but the benefit might far outweigh that hassle if you’re contributing tens of thousands via your business.

Also note, if you have employees in your business, a solo 401(k) is no longer an option – you’d need a regular 401(k) plan for the company, which comes with nondiscrimination rules and more complexity. But as long as it’s just you (and perhaps your spouse), the solo 401(k) is relatively straightforward and very generous.

One more angle: self-employed folks often have variable income. In a good year, you could load up your solo 401(k) with a big profit-sharing contribution.

In a lean year, you might contribute less. Meanwhile, your day job 401(k) might be steady. This flexibility is great – you can adjust contributions in your business plan without affecting the day job plan. Just remember, the salary deferral part ($22,500 or $30,000 with catch-up) is across both, so plan accordingly.

Bottom line: Tailor your strategy to your situation. Job hoppers should stay organized and consider consolidating accounts when possible.

High earners should exploit multiple plans to maximize contributions and manage tax treatment. The self-employed can use a second 401(k) to save far more than a single plan would allow.

In all cases, the common thread is to make informed choices so that each 401(k) you have is working as hard as possible for your retirement.

Pros and Cons of Having Two 401(k) Plans

Let’s summarize the advantages and disadvantages of maintaining two 401(k) accounts:

No two individuals are alike, and these pros and cons can weigh differently based on personal circumstances. If both of your 401(k) plans are strong, the pros may outweigh the cons as long as you stay organized. But if one plan is subpar or the hassle is too much, consolidating might tilt the balance in favor of simplicity.

Recap of Court Case Rulings on Multiple 401(k) Plans

Legally speaking, having multiple 401(k) plans is perfectly acceptable, and there haven’t been any high-profile court cases forbidding individuals from maintaining two 401(k) accounts.

The absence of courtroom drama on this topic is largely because IRS rules are very clear, and most people (and plan administrators) follow them without issue.

That said, there have been tax court cases and IRS rulings that reinforce the rules governing multiple retirement accounts.

For example, the IRS has consistently held that the annual contribution limits apply across all plans – and it’s the participant’s duty to stay within those limits. If someone fails to do so and doesn’t correct an over-contribution, the IRS can impose taxes and penalties (though these situations are usually resolved through corrections rather than drawn-out court battles).

Essentially, the “rulings” here are built into the law: you can have two 401(k)s, but you can’t double-dip beyond what’s allowed or break distribution rules.

On a related note, regulators have recognized the proliferation of multiple accounts. New policies are aimed at helping people manage them – for instance, the SECURE 2.0 Act directed the Department of Labor to create a national “Retirement Savings Lost and Found” database to help individuals locate old 401(k) accounts.

This isn’t a court case, but it shows how lawmakers are addressing the reality that many folks have numerous 401(k)s scattered from job to job. The legal system hasn’t punished people for multiple accounts; instead, it’s trying to help people reconnect with them.

In summary, no court is going to tell you that you can’t have two 401(k) plans. The courts (and the IRS) will simply enforce the rules that come with having them.

Follow those rules – contribution limits, withdrawal regulations, etc. – and you’ll stay in the clear legally while enjoying the benefits of your multiple retirement accounts.

FAQ

Can I have two 401(k) accounts at the same time?
Yes. It’s perfectly legal to hold more than one 401(k) account simultaneously. Just be sure to keep track of each account and follow the annual contribution limits so you don’t exceed them.

Does having two 401(k) accounts increase my contribution limit?
No. The IRS’s annual contribution limit applies per person, not per plan. You can split contributions between two 401(k)s, but your combined total can’t go beyond the yearly maximum allowed.

Do I have to combine 401(k) accounts when I change jobs?
No. You don’t have to combine 401(k)s when you switch jobs. You can leave the old account, roll it into your new plan, or transfer it to an IRA – whichever is best for you.

Can I contribute to a Traditional and Roth 401(k) in the same year?
Yes. You can split contributions between Traditional and Roth 401(k) options if your plan allows both. Just remember that the total of all contributions still cannot exceed the IRS annual limit for that year.

Do multiple 401(k) accounts mean multiple required minimum distributions?
Yes. Once you’re subject to RMDs (required minimum distributions), each 401(k) has its own minimum withdrawal. You must calculate and withdraw the required amount from each separate 401(k) account after reaching the mandated age.

Will having multiple 401(k) plans affect my taxes?
No. Having more than one 401(k) by itself doesn’t increase your taxes. What matters is how much you contribute pre-tax or Roth and what you withdraw. Follow the rules and your taxes remain unchanged.