How many retirement accounts do you need? Is it possible to save in different types of accounts at the same time? Does having different types of accounts help you save more—or does it just waste more time and paper?
These are smart questions to ask right now. The current U.S. retirement “system” is far from being a well-oiled machine—it’s more like a gear-grinding, smoke-belching rattletrap that’s hard for most people to manage, never mind optimize.
Case in point: As you change jobs or careers, it’s almost inevitable that you’ll end up with more than one type of retirement account—but how do you handle them? Here’s what you need to consider.
Savings: Having more than one account can enable you to save more, but you have know which accounts you can contribute to simultaneously (see below).
Taxes: It may be beneficial to have a combination of both tax-deferred and after-tax (Roth) accounts. Your tax bracket in retirement may be different than the one you’re in now, so funding both types of accounts gives you more options in retirement, tax-wise.
Cost & Convenience: The more accounts you have, the more you’re likely paying in account fees, minimums, investing charges, etc. You’ll also likely have more of a hassle at tax time. Worst, it’s much harder to oversee your asset allocation. You’ll typically save money (and time) when you roll over old 401(k) accounts and consolidate IRAs.
Account review
How do you fund multiple accounts? You can combine employer-sponsored plans and IRAs, as long as you pay attention to contribution and income limits.
Tax-deferred | Post-tax | |
---|---|---|
Employer-sponsored |
401(k), 403b, TSP |
Roth 401(k) |
Individual |
IRA, solo 401(k), SEP* |
Roth IRA, solo Roth 401(k) |
1. Traditional employer-sponsored plans. Your contributions are deducted from your paycheck before taxes are taken out, and your savings grows tax-free (i.e. tax-deferred). You pay taxes when you withdraw the money in retirement.
Often these plans include an employer match. For example, your company may match 50% of what you contribute, up to 3% of your salary. So if you save, say, 10% of your salary in that instance, you’d get an additional 3% from your employer.
2. Traditional individual accounts. These include traditional IRAs, solo 401(k)s (accounts that you set up) and SEP IRAs (which can be set up by self-employed people, or a small business employer).
3. Roth accounts (tax-free on withdrawal). Whether you’re dealing with an individual Roth account or a Roth 401(k) (a relatively new type of retirement plan), you deposit after-tax dollars, and your savings grow tax-free. The ability to contribute to a Roth IRA is subject to an income cap (see “Restrictions” below). When you withdraw the money, you don’t owe any taxes.
What to do with more than one account
The basic rule of thumb is that you can usually mix traditional and Roth accounts. You can also combine employer-sponsored and individual accounts.
For example: You can fund a 401(k) (or other employer-sponsored plan, including a SEP-IRA) and a Roth IRA. This enables you to save more, and gives you the tax flexibility mentioned above. You can also throw a traditional IRA into that mix.
If your employer offers a match, contribute to that plan first and at least get the total match before you open another account.
Restrictions
1. There are restrictions on how much you can contribute to different accounts.
The 2017 contribution limit for a 401(k) is $18,000; $24,000 if you’re 50 and over.
Then you can also deposit up to $5,500 in a Roth or traditional IRA for 2017 ($6,500 if you’re 50 and up). That’s the combined limit for both types of IRAs, by the way. You can’t put, say, $5,500 each into an IRA and a Roth IRA.
If you’re maxing out your 401(k) and have more to save, opening a Roth IRA can help you sock away another $5,500 or $6,500 a year (for restrictions, see below).
2. Then there are restrictions on how much you can deduct from your taxes.
If you’re contributing to a 401(k) or other employer plan, you can open a traditional IRA as well, but you may or may not be able to deduct that chunk of savings from your taxes, depending on your income.
Still, it does let you save more, and the gains grow tax-deferred.
3. Last, there are specific income restrictions on Roth accounts.
If your modified adjusted gross income (MAGI) is $186,000 or less in 2017 (married filing jointly), you can contribute up to the full amount in a Roth. As your income rises above $186,000, your ability to contribute phases out. Read details on Roth IRA limits here.
More from Betterment:
I like that you included a link to the IRS website for Roth limits. I found the statement, “If your modified adjusted gross income (MAGI) is $178,000 or less in 2013, you can contribute up to the full amount in a Roth.” misleading without the caveat of if you’re married. Singles have the significantly more restrictive 112k limit. Which if you’re in tech in the bay area is pretty easy to hit.
Thanks, Joshua. Good point and context. — Catherine
Hi Catherine. Great article, nicely laid out. I am 44 , married, filing jointly. I am maxing my employer 401k plan at $17,500/year (plus employer match). My wife is in the same situation with her employer’s 403b. We also are both funding a ROTH IRA each year as much as the income limit will allow. In 2012, we were each able to fund $4,850, so close to the cap. We also have a 1 year old and a 2 year old and have started them each a 529b college plan. My question is: Should I move to a strategy that partially funds my ROTH IRA and start a traditional IRA and split my IRA funding between the two? Or do I stay with just funding my ROTH IRA? We have a 15 year 2.875% mortgage on our home. We pay extra every month, and I calculated we can pay it off in in 9 more years assuming we can stay on our accelerated principal payment plan. Thank you!
Dear Tony,
Thanks for your comment. And a round of applause for your great saving! Fantastic job. You ask a great question.
I spoke with our IRA specialists and Alex Benke, CFP, here at Betterment for some answers. While we can’t give tax advice, if you are considering funding a Traditional IRA, you may want to make sure you’re getting the full benefits. Here’s the income limit for deductions if you and your wife have both contributed to a retirement plan at work for 2013 and 2014.
If your joint income is more than $115K, you won’t get a deduction for a traditional IRA contribution since you have a 401k. In that case, you should continue to fund your Roth IRA up to your limit. If you still wants to contribute the other $650 to an IRA, do a non-deductible traditional IRA (you will need to file 8606 with tax form each year to track the basis in the non-deductible IRA).
With Traditional IRAs, you can get deductions now but with Roth IRAs, you get tax free withdrawals later. Thus if you want to minimize your taxes, the best choice for you may depend on your current income tax rate, your future projected income tax rate and possibly other factors.
Either way, generally contributing to either IRA is usually beneficial for you. For the best information, please consult a qualified tax professional or IRS Publication 590.
Best, Catherine
Hi Catherine,
Thank you very much for your thorough response. I checked the table you sent and we are not eligible for deductions due to the income limits. Reading your response reminded me of why I thought the ROTH was a great vehicle for us to supplement our company retirement accounts. I checked historical tax rates, and we are at or near all-time lows in our nation’s history. For that reason, I can only deduce future tax rates will be higher. Thus, the (hopefully) wonderful benefit of paying taxes now in order to draw it tax-free later. Thanks again for your helpful work here!
Hi Catherine,
Thanks for the information. I had a question about the $51,000 annual limit on deferred compensation plans.
I have several retirement plans through work, including a 403b, 457b, and institutional deferred compensation pension plan (I know, I am pretty lucky to have the benefits at work that I do). I also have an IRA for myself and my wife. What does the $51,000 annual limit apply to? Is it just the 403b, 457b and DC pension plan, or do the IRAs factor in as well? If the IRAs do factor in, is it just my IRA that counts toward the $51,000 limit, or does my wife’s as well?
Thanks!
Thanks for your comment, Jonathan, and congrats on doing a great job maximizing your retirement savings! You have a good question, but I am going to refer your to the IRS on this as we can’t give give tax advice. You might check out this IRA page on contribution limits. Best, Catherine
I changed jobs on 01/20/14. I had 1 paycheck from my previous employer that had a 401K contribution. So technically I was a participant in a 401K plan for 2014. My new employer has a 401K plan but because of a technicality I cannot contribute to my new plan until 01/01/15. If I had started 12/31/13 it would have been 06/01/14. The question is can I open an IRA and contribute the max of $6500 (I’m 55) and get the full TAX deduction. I tried reading the IRS publications the the key word seems to be “active participant” in another plan limits the TAX deduction part of the individual IRA contribution. Looks like I can still contribute to a ROTH but I would like the tax deduction now.
Hi Ed, thanks for your question. You should probably contact your company 401k rep to make sure that this “technicality” will affect your ability to contribute to your current employer’s 401k plan, because otherwise there aren’t any specific 401k rules that would prevent you from contributing this year. Good luck! — MP
Hi Catherine,
Thank you for the helpful information. I quit my job last October and I contributed $13,000 in 401k. If I will contribute $4,500 to a traditional IRA, can I deduct this from my income since I was not able to max out my 401k? I am single and my MAGI is over 69k before the 4.5k traditional contribution. Thank you.
I cannot find a definitive answer to the question: What is the combined limit on contributions to an employer sponsored 401K and after tax contributions to a non-employer sponsored Roth IRA.
A) Is it $23,000 in the 401K plus $6,500 in the Roth IRA (single, under $112,000 AGI). B) Or is the limit JUST $23,000 TOTAL?
C) If it is the combined total, does that include the employer’s matching contributions in the 401K as well as your own?
Hi and thanks for your great question—you’re not the only one who has asked this. Here is the section from the IRS website pertaining to when you have an employer-sponsored plan.
Can I contribute to an IRA if I participate in a retirement plan at work?
You can contribute to a traditional or Roth IRA whether or not you participate in another retirement plan through your employer or business. However, you might not be able to deduct all of your traditional IRA contributions if you or your spouse participates in another retirement plan at work. Roth IRA contributions might be limited if your income exceeds a certain level.
So the firm answer to your question is that yes, providing your income is within the Roth limits, you can contribute the maximum to both.
For tax year 2013 Wife AGI=$102,000. age 62, 401K contributions $13,000. Husband has zero income. Our tax guy is telling us that since my wife didn’t max out the 401K that she is entitled to fund an IRA to the tune of $4000 tax free. Along with me (husband) funding one up to $6500..
Is this correct/possible?
Hi Bruce, thanks for your great question. Your tax guy is right…sort of. Your wife can contribute to either a traditional IRA or a Roth IRA—up to $6,500, because she’s over age 50—but given her income she could only partially deduct her contribution to a traditional IRA (for couples who are married and filing jointly, where the contributing spouse is also covered by a company plan, deductibility phases out between $95,000 and $115,000 in income). The same holds true for any contributions your wife makes to an IRA in your name (i.e. a spousal IRA). She could sock away up to $6,500 for herself and another $6,500 for you, but she’d only be able to deduct part of that contribution to a traditional IRA. It might be better to put your savings into a Roth IRA; here you contribute after-tax dollars and withdraw your money tax-free in retirement. Betterment does not provide tax advice, so please consult your tax professional. Thanks again for reaching out, MP