Saving for retirement is one of the smartest financial moves you can make. With people living longer than ever, a comfortable nest egg is crucial to fund what could be decades of life after your working years.
Most Americans rely heavily on their 401(k) plans to build that retirement savings. But did you know you can supercharge your savings by opening more than one 401(k)?
It’s true: You are allowed to contribute to multiple 401(k)s in the same year. Doing so can help you make the most of valuable tax advantages, maximize employer matches, and reach ambitious savings goals faster.
Read on to learn why opening a second 401(k) could be a savvy strategy on the road to retirement security.
The Virtues of Multiple 401(k)s: More Tax Savings Now, More Wealth Later
401(k) plans offer two major perks: tax-deferred growth and potentially free money through an employer match. Contributions come out of your paycheck before taxes, reducing your current taxable income.
That money then gets invested and grows tax-free until retirement. Employers often match part of employee contributions too, typically from 3% to 6% of your salary.
Open more than one 401(k), and you get to double up on those rewards. You can contribute up to the federal limit – $20,500 in 2023 if you are under 50 – to each plan.
Contributing to two 401(k)s effectively allows you to put away up to $41,000 in pre-tax dollars this year! For those over 50, the numbers are even more impressive, with an $27,000 limit per plan.
When you run the numbers, a second 401(k) accelerates your wealth building in two powerful ways:
- 1) More money invested earlier means more years of tax-free growth
- 2) Higher contributions today mean you could reach retirement with significantly more savings
For example, let’s look at two hypothetical savers who both begin investing at age 30, earning $100,000 salaries with a 6% employer match and averaged 7% annual returns. After 35 years, Saver A retires with the maximum $20,500 contributed to one 401(k) each year.
But Saver B splits contributions between two 401(k)s, investing the annual maximum of $41,000. Saver B ends up with a nest egg 68% bigger! That’s over $500,000 extra simply by opening a second account!
When and Why Opening a Second 401(k) Makes Sense
Clearly, there are major advantages to socking away as much as possible in 401(k) accounts early in your career. But opening more than one may or may not be the right move depending on your situation:
It can work well if you are self-employed or have multiple sources of income. For the self-employed, solo 401(k)s allow up to $61,000 in total contributions per year. If you moonlight or earn supplemental income, a second 401(k) means you can save more in tax-advantaged accounts.
A spouse’s plan presents another opportunity. You can open your own 401(k) even if your spouse has one through their job. This allows you to contribute much more towards retirement as a couple.
Job change can provide a good window. Start a new 401(k) when you switch employers, but you may be able to keep the old one too. This allows you to consolidation accounts when the time is right.
You’re already maxing out contributions. If you are already saving the federal maximum in your current 401(k), opening a second account is the only way to shelter more money from taxes.
Just watch out for fees. Lower-cost index funds and ETFs make the most sense for a supplementary 401(k). Actively managed options with higher fees could eat into your returns.
The key is contributing as much as possible in those early earning years while also taking full advantage of compound growth over long time horizons. 401(k) accounts are designed specifically to make that happen in a tax-smart way.
Strategies to Open More Than One 401(k)
If contributing to multiple 401(k)s fits with your savings strategy, here are three approaches that can work:
1. Starting a Side Hustle
Launching a small side business allows you to open another retirement account, such as an Individual 401(k) or Solo 401(k). These function similarly to traditional 401(k)s but are designed for solo ventures.
The contribution limits are extremely generous – up to $61,000 per year! You don’t necessarily need a full-blown business either. Freelance work, consulting, and many creative projects qualify.
2. Opening Accounts with Separate Employers
Working two jobs, whether simultaneously or at different times, means you likely have two workplace 401(k) options. You can open independent accounts with each employer. The key is avoiding vesting issues or withdrawal restrictions related to employer matches if you leave the company before meeting tenure requirements.
3. Combining a 401(k) with Other Retirement Accounts
It may make sense to complement your existing 401(k) with another tax-advantaged account like an IRA. Options include Traditional, Roth, and SIMPLE IRAs.
Each have different tax implications, with Traditional IRAs offering tax-deductible contributions like 401(k)s. You can then make the maximum allowable contributions across both your 401(k) and IRA each year.
No matter what, always strive for the full federal limits each year in your retirement investing. Opening more than one 401(k) account can help ambitious savers supercharge their savings.
That sets the stage for greater tax savings upfront and provides the power of compound growth more time to work its magic. The result by retirement? Potentially hundreds of thousands more wealth that you can actually enjoy instead of just scraping by.