The average person changes jobs 12 times over their lifetime. If you invest in a 401K in each of the jobs, it can be challenging to keep track of where your money is, and the administrative fees for these accounts can really add up. On the other hand, if the administrative fees in an account are low, financially, it may make sense to leave your money in an old 401K account.
While it is possible to have multiple 401K accounts, leaving money in an old account can cause problems. Some 401K account administrators will not accept transfers from old 401K accounts, and there is a possibility that the funds in your old 401K account will undergo a forced transfer into an IRA account.
Understanding 401K accounts
Employers provide a 401K account as a tax-advantaged benefit to assist employees in saving for their retirement. Employees can deposit pre-tax dollars into their 401K account. Sometimes, employers will match these deposits. Earnings from your 401K investment portfolio can grow tax-free.
With a traditional 401K, employees can elect to contribute a pre-defined percentage of their pre-tax income to their 401K as long as they stay under the contribution maximum. Employers can also make contributions to the plan and set up a vesting schedule, which gives the employee ownership of the employer-contributed funds over time.
With a safe harbor 401K plan, the employer contributions are fully vested when the contributions are made. Otherwise, the plan is similar to a traditional 401K plan.
Small companies with 100 or fewer employees may also offer a simple 401K plan to their employees who earn at least $5,000 in compensation from the employer each year.
With a Roth 401K, contributions are made to the account after taxes are taken out. You do not receive a tax deduction for the money contributed to your Roth 401K that year. The benefit of a Roth 401K is that you do not have to pay any additional taxes on the money, even when you withdraw it in retirement.
Unless you want to pay both income taxes and a 10% early withdrawal penalty, you need to leave your money in your 401K account until you reach age 59½. Once you reach this age, you can withdraw money and only pay your current tax rate on these withdrawals.
401K Contribution Limits
The Internal Revenue Service (IRS) defines the contribution limits for 401K accounts. For 2024, individuals under age 50 can contribute a maximum of $23,000 to their 401K accounts. If you are over age 50, you can contribute an additional $7,500 catch-up contribution.
For workers under age 50, the combined contributions from the employee and employer are capped at $69,000 per year. If the employee is over age 50, they can still take advantage of the $7,500 catch-up contribution.
Required Minimum Withdrawals
If you invest in a traditional 401K, you are required to begin taking required minimum withdrawals (RMDs) once you reach age 73. The amount you must withdraw is based on your predicted life expectancy at the time.
Leaving Your Job
You have four options for your traditional 401K when you leave your job:
- Withdraw the money: this is the worst possible choice because, unless you are over age 59½ or meet exemption criteria set by the IRS, you will need to pay taxes and a 10% early withdrawal fee, and you will reduce your retirement savings.
- Leave your 401K alone: If your employer allows it, you can leave your 401K with your previous employer. You will no longer be able to contribute to the account, and there may be a minimum ($5,000) requirement for the account. If you choose this option, make sure you keep track of your old accounts for yourself and your heirs.
- Move your 401K: You can move your 401K balance into your new 401K account using the rollover option. Rolling a 401K into another eligible account maintains its tax-deferred status. Before rolling one account to another, check the investment options and the administration fees.
- Rollover to an IRA: You can also rollover your 401K balance into a traditional or Roth IRA. If you choose the Roth IRA option, you must include any untaxed rollover funds in your gross income for the year.
Can you have more than one 401K?
Yes, it is possible to have multiple 401K accounts, especially if you have changed jobs or are self-employed and working for an employer.
If you have multiple 401K accounts that you contribute to, your total contribution must fall under the IRS contribution limit.
Discuss your investment options with a fee-only NYC financial planner. They can help you determine how to invest strategically to maximize your retirement income, minimize fees, and reduce your tax burden.
There is no one-size-fits-all guide to investment. Working with a wealth manager who uses a fee-only financial planning structure can ensure you make the best financial decisions for yourself and your loved ones. Ready to secure your financial future? Call us today at 866-395-1786 to get started.
