Most people set aside money for their nest egg over the course of their working lives, and some end up with multiple account plans. Is it a good idea to consolidate into one retirement account or is it preferable to have several?
Before we answer that question, let’s do a brief roundup of the common types of retirement plans:
- A Traditional IRA is an account that allows you to make pre-tax contributions. Annual contributions can result in yearly tax breaks, but when you make withdrawals during retirement they are considered taxable income. The 2024 contribution limit is $7,000, with an additional catch-up limit of $1,000 if you’re 50 or older.
- A Roth IRA features tax-free growth and tax-free withdrawals after you retire. You can withdraw your money without paying federal taxes once you’ve had the account for five years and you’ve reached the age of 59½ or older. As with a traditional IRA, the contribution limit is $7,000, $8,000 if you’re 50 or above.
- A 401(k) is only offered by employers. Employees often have their contributions automatically debited from their paychecks and employers sometimes match all or a portion of the contributions. The money is invested in funds chosen by the employee. The 2024 contribution limit is $23,000 with an additional $7,500 catchup for ages 50 and older.
- A Simple IRA is designed for small businesses. Both employers and employees can make contributions. The 2024 contribution limit is $16,000 with an additional $3,500 catch-up contribution limit for savers 50 and older.
- A SEP IRA is an account for small business owners or those who are self-employed. The 2024 contribution limit is either $69,000 or 25% of the first $345,000 of your income, whichever is lower.
How Many Accounts Does the Law Allow?
There is no legal limit. You can have as many retirement accounts as you like. But keep in mind that the IRS dictates the amounts you can contribute to each, as noted above. These contribution limits apply to the types of accounts as a whole. This means that if you have, for instance, two 401(k)s, the $23,000 limit applies to both of them together. You can’t contribute $23,000 to each account.
What Are The Upsides and Downsides of Managing Multiple Plans?
It’s important to weigh the pros and cons of multiple accounts. Pros include:
- Possible tax benefits. This is dependent on your tax situation and income.
- Flexibility due to the differing rules governing various retirement accounts and their attendant benefits. This can allow you to shape your retirement savings to fit your particular needs.
Possible downsides include:
- Too many fees. You could end up with an excessive total of fees from various accounts.
- Redundant investments. The more retirement accounts you have, the higher the odds that some of your investments could overlap, which cancels out the benefits of diversification.
- Time-consuming complications. Multiple accounts—especially when they’re different types—can be difficult and complicated to manage and may take up more of your free time than you’d like.
Juggling Multiple Retirement Accounts
Here are some key points to keep in mind if you decide to go with several plans at once. These are important for proper retirement account management:
- Consult a financial advisor. It’s always a great idea to have a knowledgeable professional guide you with any money-related endeavors. A financial advisor can help you decide which retirement plans are best for you and your particular needs.
- Regularly review your portfolio. Go over your accounts consistently to make sure your assets are allocated to their best advantage.
- Consider consolidation. You might find that it makes sense to simplify your portfolio and reduce your fees by consolidating similar accounts.
- Be careful with contribution limits. Be sure to avoid exceeding your contribution and income limits as they apply to each of your retirement accounts.
In the end, only you can decide what works for you. Talk it over with a financial advisor and find your best path forward to a comfortable and rewarding retirement.