Can You Contribute to More Than One 401(k)?

Why You Might Contribute to Multiple 401(k)s

Who has the opportunity to contribute to more than one 401(k) in a year? Here are a few situations where multiple 401(k)s are a possibility:

• You hold two jobs at the same time and are eligible for a 401(k) plan at both.
• You have a regular job and a side business, and you've started your own solo 401(k).
• You started the year at one job and transitioned to a new job midyear.

Why Contribute to More Than One 401(k)?

Just because you can contribute to multiple 401(k)s doesn't mean you will. But there may be benefits to splitting your allowable contribution between plans. Here are a few to consider:

• You've maximized your employer match at one job and want to receive matching dollars at your second job.
• Your primary employer's plan doesn't allow catch-up contributions and you'd like to put away the additional cash.
• You want to take advantage of unique plan benefits, such as being able to buy preferred stock, in one (or both) of your plans.
• You've changed jobs and want to continue contributing toward your retirement at your new place of employment.
• You want to maximize your retirement contribution beyond the available limits on your primary 401(k).

What Are the Limits When Contributing to Multiple 401(k)s?

There are multiple limits to think about when contributing to more than one 401(k). IRS guidelines cover employee contributions, employer matching and nonelective contributions, and compensation. If you're thinking of contributing to multiple 401(k)s, these are the limits to bear in mind.

What You Contribute

Your elective salary deferrals, or the amount you contribute from your income to all 401(k) plans combined, cannot exceed $22,500 in 2023. Keep in mind that this limit is per taxpayer, not per employer or plan, which means you can split your contribution between plans any way you like. The employee elective deferral limit changes periodically with IRS cost-of-living adjustments.

What Your Employer Contributes

For 2023, the annual 401(k) limit for employee and employer combined contributions is $66,000. This includes your contributions, employer matching funds, employer nonelective contributions and allocations of plan forfeitures. Additionally, employees ages 50 and over can make catch-up contributions of $7,500.

The overall contribution limit applies to each eligible plan, which means you and two employers could theoretically contribute up to $132,000 in two unrelated 401(k) plans in 2023. And since catch-up contributions are additional, if you're 50 or older, you can contribute an additional $7,500 to each plan for a per-plan total of $73,500.

However, your combined total contribution also can't exceed 100% of your compensation per employer. So, even though the combined limit is $66,000, if you make $4,000 working a second job, your total contribution to that account—including employer matching dollars—can't exceed $4,000.

Compensation Limits

The IRS also imposes compensation limits to discourage plans from unfairly favoring highly compensated employees. In 2023, no more than $330,000 of compensation may be considered when determining employer matching contributions. For example, if your employer matches 401(k) contributions dollar for dollar up to 5% and you make $400,000 a year, you can contribute a full 5% (or $20,000) in salary deferrals, but your employer can only contribute $16,500, or 5% of $330,000.

Handling Excess Contributions

If you over-contribute to your 401(k) accounts, the IRS requires you to withdraw excess contributions. Excess contributions withdrawn before April 15 (or whenever taxes are due the following year) are includable in your gross income for the year, but are not subject to an additional 10% tax on early distributions. Withdrawals made after tax day the following year are taxable as income in the year the contribution was made, and again in the year the withdrawal is made. Watch your contributions carefully to avoid over-contributing.

How to Structure Multiple 401(k) Contributions

Contributing to multiple 401(k)s at once can be complicated, so if you have access to plan administrators and/or a financial advisor, this may be a good time to seek out professional help. In addition to following IRS guidelines on contributions and compensation, you'll need to observe any specific limitations set by your individual 401(k) plans.

Start by determining how much you can contribute for the year. In 2023, the 401(k) contribution limit for employees is $22,500 or $30,000 if you're 50 or older.

Here are a few contribution scenarios to consider:

Maximize Your Match

• Determine each employer's matching policy and limits.
• Start with the plan that has the best matching and choose a contribution level that maxes out your available matching contribution.
• If you still have dollars to invest before reaching your employee contribution limit of $22,500, consider allocating your remaining funds to your second plan, to take advantage of matching dollars there.

Supercharge Savings With a Solo 401(k)

• Contribute to your employer's 401(k) up to the maximum available match.
• Make a nonelective employer contribution to your solo 401(k) for up to 100% of your compensation (but not to exceed $66,000, plus catch-up if you're eligible). If you made $50,000, you can contribute all $50,000 to your solo 401(k), since each 401(k) plan you contribute to has its own $66,000 combined contribution limit.

In all cases, calibrate your paycheck deductions so that all of your contributions total $22,500 or less (plus a catch-up, if you're eligible). Double-check the math on your paycheck and monitor your contributions throughout the year to make sure you aren't going over your contribution limit. If you accidentally contribute too much to your 401(k), fix the error as soon as possible to avoid IRS penalties.

Whenever you leave a job, consider rolling your 401(k) funds over into your current employer's 401(k)—if you're able—or into a rollover IRA. Maintaining multiple 401(k)s over the long haul can be more difficult to manage than rolling all your retirement funds into a single account.

Other Ways to Save for Retirement

You don't have to get a second job to maximize your retirement contribution. If you don't have access to a second 401(k), consider the following options for long-term savings.

Traditional and Roth IRAs

You can contribute to a traditional or Roth IRA even if you have a 401(k) at work. The IRA contribution limit for 2023 is $6,500 with a $1,000 catch-up contribution for people 50 and older.

Health Savings Accounts (HSAs)

If you have a qualifying high-deductible health plan, you can save money in an HSA to cover medical and dental expenses including insurance deductibles and copays, and out-of-pocket health care expenses. HSA contributions are tax-deductible, earnings are tax-free within the account, and qualified withdrawals are tax-free as well.

High-Yield Savings Account

Although a high-yield savings account doesn't have the tax advantages that a 401(k), IRA or HSA might, you can contribute any amount and withdraw your money whenever you'd like. As interest rates have risen, APYs on high-yield savings have become more attractive. Savers might also consider CDs for long-term savings.

The Bottom Line

Contributing to multiple 401(k)s generally requires more effort than contributing to one. You may need to put additional thought into setting up your contributions so you don't overfund your accounts. And because your money will be growing in two different places, you may have to do manual calculations to make sure your combined 401(k) contributions aren't going over the limit, especially if your income is variable at either job. There's also twice as much work monitoring your funds' performance, tracking fees and checking for fraud or errors.

But maximizing your contributions and matching dollars over multiple 401(k)s can also help you save more aggressively and get the most out of your plans. If you're up for the challenge, talk to your plan administrators or a financial advisor about the best way to get started.