Smart Savings Strategy: Multiple Retirement Accounts

Smart Savings Strategy: Multiple Retirement Accounts  

Consider that, if you have an annual income in the range of $65,000 to $70,000, proper structuring of your retirement accounts can easily save you over $1,200 in taxes each year.

Then, once your retirement corpus crosses the $1 million mark, having a mix of taxable and tax-free retirement accounts can help you reduce your annual tax burden during retirement by as much as 4x.

Structured retirement accounts hold the key to a comfortable, even luxurious retirement income. However, figuring out how and where to get started can seem overwhelming, with a jungle of jargon to contend with and a plethora of options to consider.

If you’ve been wrestling with questions like, “how exactly is a Roth IRA different from a traditional IRA?”, “do I need an HSA if I already have a 401(k)?” and “why do some resources tell me to diversify my retirement accounts while others advise me to consolidate?” then this article is for you.

Dive in to get a good grasp of how multiple types of retirement accounts can be a solid foundation for a secure retirement.

The Basics of Retirement Accounts

Understanding the types of accounts available for planning your retirement is the first step toward building a diverse retirement portfolio tailored to your life and financial goals. 

Retirement accounts come in a variety of types, each designed to help you save for your future while offering unique benefits. Let’s start by breaking them into three main categories: 

• Employer-sponsored plans aka 401(k)s,
• Individual Retirement Accounts (IRAs), and 
• Other specialized retirement accounts

Employer-Sponsored Plans: 401(k)s

Employer-sponsored 401(k) plans are a cornerstone of retirement savings. These accounts allow you to contribute pre- or post-tax dollars to an account set up by your employer.

A great advantage of employer-sponsored plans is that they typically benefit from employer matching – meaning that every dollar you put in is matched by your employer. Naturally, this helps your retirement funds grow at 2x the pace they would otherwise grow.

Traditional 401(k)

Offered by employers, 401(k) plans are typically the backbone of retirement savings for many. Contributions are pre-tax—this means that there is no tax levied on money put into a traditional 401(k). Note that 401(k) withdrawals are subject to taxation. See the table below for a summary of eligibility and contribution criteria for a 401(k).

Roth 401(k) 

Like a Roth IRA, contributions to a Roth 401(k) account are post-tax—that is, they are taxed at the time of putting in the money. Similarly to Roth IRAs, Roth 401(k) withdrawals are tax-free, making them an attractive option for those who calculate that they are currently in a lower tax bracket and will attain a higher bracket by the time of retirement.

Check out our helpful post on traditional vs. Roth 401(k)s to find out which one is right for you. 

403(b) Plans

Designed for employees of nonprofit organizations, such as schools, hospitals, and religious groups, a 403(b) plan offers tax-deferred growth; this means that contributions are pre-tax and growth is tax-free (similar to traditional 401(k)s and IRAs). Additionally, depending on the employer, a 403(b) plan may include unique investment options like annuities.

457 Plans

Tailored for state and local government employees, as well as some non-governmental organizations, a 457 plan also allows for tax-deferred growth. An added advantage is that 457s are typically free of early withdrawal penalties, making them more flexible for accessing funds before retirement age. Look up contribution and eligibility criteria in the table below.

Individual Retirement Accounts (IRAs)

Individual Retirement Accounts (IRAs) are personal savings plans. Like 401(k)s and other employer-sponsored plans, IRAs offer tax advantages to help you grow your retirement nest egg. 

However, IRAs are entirely autonomous of your employer, meaning that you don’t need an employer to set up an IRA—in fact, you don’t even need to be employed.

Traditional IRA 

With a traditional IRA, you contribute pre-tax money, meaning you get an upfront tax break. The funds grow tax-free, but you’ll pay taxes when you withdraw the money in retirement. Traditional IRAs are a great option if you find yourself in a high tax bracket now but expect to be in a lower tax bracket later. See the table below for a summary of eligibility and contribution criteria for IRAs. 

Roth IRA

A Roth IRA flips the tax benefits. You pay taxes on contributions now, but your money grows tax-free, and you pay no taxes on withdrawals. This is ideal if you’re in a lower tax bracket today or want tax-free income in retirement.

Other Specialized Retirement Accounts

Specialized retirement accounts like SEP IRAs and Health Savings Accounts (HSAs) provide additional options tailored to the rather different requirements of small business owners, self-employed individuals, and those looking for versatile tax-advantaged savings.

Simplified Employee Pension (SEP) IRAs

SEP IRAs are designed for self-employed individuals and small business owners, allowing them to make significant contributions to retirement funds intended for themselves or their employees. Up to 25% of the individual’s monthly compensation or a set annual limit may be pre-specified. All SEP contributions are made by employers.

Solo 401(k)

Also known as Individual 401(k) or Self-directed 401(k) plans, Solo 401(k)s are designed specifically for self-employed individuals with no employees other than themselves and their spouses. These plans combine features of traditional 401(k)s with unique advantages for business owners. The account holder can contribute both as employee and employer—making pre-tax salary deferrals up to the standard 401(k) limit, plus additional profit-sharing contributions as the employer. This dual contribution capability often allows for higher total contributions than SEP IRAs.

Savings Incentive Match Plan for Employees (SIMPLE) IRAs

SIMPLE IRAs are a cost-effective option for small businesses with 100 or fewer employees, enabling both employers and employees to contribute. Employers are required to either match employee contributions or make a fixed percentage contribution regardless of employee participation.

Health Savings Accounts (HSAs)

While technically for medical expenses, HSAs double as a tax-advantaged retirement account. Contributions are tax-deductible (similarly to traditional IRAs) and growth is tax-free. Arguably the biggest advantage of HSAs is that withdrawals for qualified expenses aren’t taxed—in other words, with careful planning, HSA funds can be completely free of tax. Refer to the table below for contribution and eligibility details.+

†Note that $23,000 ($30,500 for those over 50) is the annual investment cap across employee-sponsored plans (in 2024). For those holding both a 401(k) and 403(b), for example, the cumulative yearly contribution must not exceed $23,000.

‡Note that $7,000 ($8,000 for those over 50) is the annual investment cap across IRAs (in 2024). For those holding both a traditional and a Roth IRA, for example, the cumulative yearly contribution must not exceed $7,000.

Why Multiple Retirement Accounts Make Sense

Having multiple retirement accounts isn't just about spreading your savings. It's a strategic way to adapt your strategy to changing life circumstances, such as income fluctuations or tax rate changes.

Tax Savings

For example, traditional accounts like a 401(k) allow you to defer taxes, which is particularly advantageous during high-income years. Meanwhile, Roth accounts, with tax-free withdrawals, shine during retirement or low-income periods. 

Balancing contributions to both gives you flexibility to manage withdrawals efficiently when tax rates spike or dip.

Maximizing Growth

Moreover, employer-sponsored accounts provide benefits such as matching contributions, which are essentially free money toward your retirement. Personal accounts, like IRAs, supplement these savings with more control over investment choices. 

Together, a 401(k) and an IRA can form a financial safety net. If one account type underperforms, the other can compensate.

Optimizing for Life Goals

Beyond tax strategy, multiple accounts let you align your investments with specific life goals. To illustrate, a Roth IRA can be utilized to fund an early retirement phase. A traditional 401(k) can then be used to cover later years, when spending has stabilized.

Meeting Specific Needs

Finally, certain accounts like Health Savings Accounts (HSAs) cater to specific needs. These multi-use accounts can cover medical expenses while doubling as a retirement vehicle for later years. In essence, multiple accounts equip you with options to navigate the complexities of long-term financial planning effectively.

Challenges of Managing Multiple Retirement Accounts

Having multiple retirement accounts offers flexibility. However, it also brings complexities that can trip you up if left unmanaged. The following are the biggest challenges to navigate in effectively managing retirement fund growth.

Tracking Contributions

Keeping track of contributions across various accounts can be difficult, especially with annual limits (see table above). Exceeding limits may result in penalties.  

Required Minimum Distributions (RMDs)

Tax-deferred accounts mandate RMDs starting at a certain age, and missing these can lead to steep penalties.

Case example

Say a 74 year-old owns a traditional IRA which has a balance of $500,000 and a calculated RMD of $20,000. As per current IRS rules (2024), this individual must take their first RMD by April 1st of the year following their 73rd birthday. If they fail to take this distribution, the IRS levies a severe penalty – a full 25% of the amount not withdrawn – in this case, $5,000 (25% × $20,000). Correcting the mistake (by taking an RMD) within 2 years of the stipulated date can bring down the penalty to 10% ($2,000 instead of $5,000).

Disclaimer: The example above is for illustrative purposes only. The rules and age requirements for RMDs are subject to frequent changes (for example, in the wake of recent legislation such as the SECURE Act and SECURE 2.0). It is advisable to consult with a qualified financial advisor or the IRS directly for the most current requirements and penalty structures.  

Fee Management

Different accounts often come with varying administrative or investment fees. Without due oversight, these costs can significantly reduce your long-term savings.

The list below includes some (but not all) of the fees and costs that may be associated with your retirement accounts.

• Investment-level fees

These include expense ratios on mutual funds/ETFs, trading costs, and sales loads. 

Investment expense ratios are a perfect example of an often-overlooked retirement account cost that can significantly impact long-term wealth accumulation (see case example below). These are ongoing fees charged by mutual funds and ETFs to cover their operating expenses.

• Account-level fees

Financial institutions charge periodic (for example, annual) maintenance or custodial fees.

• Plan administration fees

There are separate fees typically charged for record-keeping, compliance testing, and plan management, particularly for 401(k) plans.

• Transaction fees

Charges for buying/selling investments, though many brokers now offer commission-free trades.

• Advisory fees

Lastly, you need to pay professional fees if you work with a financial advisor who manages your accounts.

Case example

Say you have $100,000 invested in a mutual fund with an expense ratio of 1% versus a similar fund charging 0.1%. The 0.9% difference seems minor, right?

But… over 30 years, assuming a 7% annual return before fees:

• With the 1% expense ratio fund, your account would grow to about $574,349
• With the 0.1% expense ratio fund, your account would grow to about $761,225

That seemingly small difference in fees ends up costing nearly $187,000 in lost returns over three decades.

What makes expense ratios particularly sneaky is that they're deducted automatically from fund returns—you never see a bill or write a check, so they're easy to ignore. Yet they represent a continuous drag on your investment performance that compounds over time. 

Redundant Investments

Overlapping investments across accounts can lead to a lack of diversification, increasing your risk exposure unnecessarily.  

Administrative Details

Outdated beneficiary designations or missed account maintenance tasks can create legal or financial issues for your heirs.

Practical Strategies for Retirement Account Management

Having the right structure and management approach for your retirement accounts significantly impacts their long-term performance. While the tools and techniques of today make oversight easier, strategic decisions about account structure remain crucial.

Digital Management and Review

Modern portfolio management apps allow you to keep track of your retirement accounts easily and accurately. The key features you need for staying on top of your investments include:

• automated contribution tracking
• consolidated views across providers and investments
• alerts for key deadlines

However, take the following precautions in order to exploit digital advantages without falling prey to digital loopholes:

• select tools that offer robust security features
• ensure integration with major providers
• set up regular quarterly reviews to help catch issues early
• rebalance portfolios on an ongoing basis
• update beneficiary information as needed

Provider Selection and Account Structure

The choice between maintaining multiple retirement accounts or consolidating depends on multiple factors. The rest of this section outlines the major considerations that drive your retirement account planning:

1. Career stage

Early-career professionals usually benefit from maintaining separate accounts to maximize employer matches and catch-up provisions. At this stage, it pays to prioritize providers offering competitive employer matches and diverse investment options, even if this means managing multiple accounts.

Mid-career professionals would do well to opt for providers offering broader investment menus. For example, self-directed IRAs would allow them access to alternative investments like real estate or individual stocks. Similarly, they could choose 401(k) platforms featuring lower-cost investment vehicles rather than limiting themselves to high-cost retail mutual funds.

Finally, those nearing retirement might look for providers that excel in distribution planning and offer robust withdrawal tools. At this stage, consolidation can simplify required distributions and reduce administrative overhead.

2. Short- and long-term financial goals

For short-term goals like buying a house or setting up a college fund, it may be warranted to select a provider offering loan provisions or flexible withdrawal options. On the other hand, long-term wealth building requires focusing on a provider with a strong track record in institutional investment management and retirement planning.  

Consider whether specialized accounts (like HSAs with investment options) can serve dual purposes, meeting both immediate needs and retirement objectives.

3. Service quality and cost

Evaluate providers on their total cost structure – not just trading fees, but expense ratios (see example above), account maintenance fees, and advisory services. High-quality research tools, educational resources, and responsive customer service can justify slightly higher fees. However, be wary of providers charging premium prices for basic index fund access or standard retirement planning tools.

Guidelines for Retirement Account Consolidation

If considering retirement account consolidation, follow the steps outlined below to ensure a smooth and successful consolidation process.

Step #1: Review Your Current Accounts

First, gather recent statements from all retirement accounts and document:

• Account balances and types (Traditional, Roth, 401(k), etc.)
• Investment options and associated fees
• Any unique benefits like loan provisions or special investment choices

This will help you form a clear picture of potential gains and losses through consolidation. At this stage, consider consulting a tax professional to ensure that you do not end up forfeiting tax advantages through consolidation.

Step #2: Formulate Your Consolidation Strategy

Although there is no universal ‘consolidation solution', the following strategies are widely employed during retirement account consolidation.

401(k) consolidation

Accounts from previous employers are generally consolidated through one of two methods:

1. Rolled into the current employer's 401(k), if allowed, OR
2. Transferred to an IRA with a financial institution of the individual's choosing

Pro Tip: Always maintain separate accounts for traditional and Roth IRAs, so as not to lose out on tax advantages; never merge these during a consolidation.

Special retirement accounts

Here are some points to keep in mind while consolidating SEP IRAs, SIMPLE IRAs and Solo 401(k)s.

1. SEP IRAs can merge with traditional IRAs, as the same tax rules apply to both
2. Solo 401(k)s are eligible for IRA rollover upon ending self-employment
3. SIMPLE IRAs require a 2-year waiting period, after which they may be rolled into a traditional IRA
4. HSAs – These can be transferred between HSA providers, but cannot be combined with other retirement accounts. (In other words, HSAs must remain HSAs.) Note that consolidating HSAs makes sense only if this represents a significant cost savings; consider keeping HSAs separate if they offer unique investment options or healthcare spending features.

Step #3 – Initiate and Track Transfer

Be sure to follow these steps carefully in order to ensure a correct and complete consolidation:

1. Contact your chosen receiving institution first
2. Request a “direct rollover” or “trustee-to-trustee transfer”
3. Complete required paperwork, which typically includes:

• Account transfer forms
• Letter of acceptance from the receiving institution
• Current account statements

4. Monitor your accounts to ensure the transfer completes (typically 2-3 weeks)
5. Confirm your investment selections in the new account
6. Verify that the old account closes properly
7. Ensure that you keep all documentation for tax purposes

Pro Tip: While transferring a retirement account, never accept a check payable to you personally, as this could trigger taxes. Insist on a direct, institutional transfer.

FAQs about Managing Multiple Retirement Accounts

1. How can I avoid exceeding IRS contribution limits when contributing to multiple retirement plans?  

Regular review and monitoring are crucial in making sure you avoid excess contributions and potential penalties. For instance, the combined employee contribution limit for 401(k) and 403(b) plans is $23,000 in 2024.  

2. Is it beneficial to consolidate my retirement accounts?  

Consolidating accounts can simplify management, reduce administrative fees, and provide a holistic view of your portfolio. However, it's essential to consider factors like career stage and financial goals (see section above). 

3. Can I have multiple IRAs, and are there advantages to doing so?  

Yes, you can have multiple IRAs, including both traditional and Roth IRAs. This strategy offers investment diversification and tax efficiency. However, managing multiple accounts may increase complexity and potential fees. 

4. What are the potential pitfalls of maintaining retirement savings in multiple brokerage accounts?  

Having multiple accounts can lead to higher fees, increased complexity in managing investments, and the risk of overlooking required minimum distributions (RMDs). It's important to regularly review each account to ensure they align with your investment goals and to keep track of all associated fees. 

5. How can I effectively manage required minimum distributions (RMDs) across multiple accounts?  

Coordinating RMDs from various accounts requires careful planning to avoid penalties. Each account type may have different RMD rules, so it's advisable to consult with a financial advisor to develop a strategy that ensures all RMDs are taken correctly and on time.

Next Steps

Managing multiple retirement accounts requires a clear strategy, attention to detail and consistent oversight. Now that you have the foundational knowledge to make informed decisions, you’re ready to take charge of planning your retirement savings.

To learn how you can build a structured investment plan that is tailored to your unique needs and life situation, check out my free course on budgeting and planning for financial independence.