Can you have multiple retirement accounts?

This article explores the concept of managing multiple retirement accounts and whether it’s a smart financial decision. While having more than one retirement account can provide benefits like diversification, employer match, and tax advantages, it can also introduce unnecessary complexity and missed opportunities for compounding. This guide weighs the pros and cons to help you better understand maintaining your retirement savings while minimizing hassle.

When considering whether having multiple retirement accounts is a good idea financially speaking, less can be more. 

While there are certain scenarios where having multiple retirement accounts can be a smart idea, there are also many others where having multiple accounts can add unnecessary complexity, not to mention potential financial downsides.

 Let’s explore the pros and cons of having more than one retirement account.

Can you have more than one retirement account? Yes.

In fact, there are no limits to the number of individual retirement accounts (IRAs) you can have. There is however, a limit to how much you can contribute to all your retirement accounts, combined, in a given tax year. According to the IRS:

“The amount you can defer (including pre-tax and Roth contributions) to all your plans (not including 457(b) plans) is $23,000 in 2024 ($22,500 in 2023; $20,500 in 2022; $19,500 in 2020 and 2021; $19,000 in 2021).”¹

But the question of what you can do is different than the question of what you should do.

Every individual’s circumstances are different. Below, we will explore why you might want to have multiple retirement accounts, followed by an explanation of why the inverse might be true.

There are some good reasons to invest your retirement money across more than one account, including:

By holding more than one retirement account, you may benefit from a more diversified portfolio. That being said, there are diminishing returns to this approach, meaning that the more retirement accounts you hold, the more likely there is to be overlap between the holdings in each one.

Most financial advisors advise those who work as employees to max out contributions to their employer-provided 401(k) plan up to an employer-matched amount.

For employers who offer matching, they will usually contribute an equal amount to what you do to your 401(k), up to a certain percent of your salary. In this type of scenario, and depending on your goals, contributing only enough to max out these contributions and then diversifying may be smart.

This can be particularly true for retirement savers looking for tax advantages by opening up a Roth IRA.

 Whereas 401(k) plans allow you to contribute tax-deferred dollars and pay taxes upon withdrawal of your funds in retirement, Roth IRAs require you to put in after-tax dollars, meaning when you withdraw funds later, you generally won’t be subject to taxation.

Hedging your bets with an additional retirement account or even a savings account can also be wise as a safety measure for a better balance in your overall portfolio.

Having more than one retirement account might be smart in the above instances. But what about multiple? For some retirement savers, the added complexity of managing multiple retirement accounts generally isn’t worth the added headache.

Here are a few reasons why that is often the case.

You cannot hold funds in a retirement account indefinitely.² Required minimum distributions stipulate how much you need to withdraw each tax year from your retirement account, and at what age you must start doing so.

Each retirement account you have could have different RMDs, making managing them all needlessly complex.

What’s more, there are serious tax penalties for failing to take required minimum distributions. Per the IRS, “If an account owner fails to withdraw the full amount of the RMD by the due date, the amount not withdrawn is subject to a 50% excise tax.”³

By keeping retirement holdings spread thinly across various accounts, you could be losing out on the power of compound interest.

By contrast, were you holding a larger portion of your retirement funds in one consolidated, yet well-diversified, fund, you could stand to make a lot more over time due to the power of compound interest.

The more retirement accounts you have the more likely you are to be subject to a variety of fees, especially if your retirement funds are managed.

Keeping track of these fees adds cost and complexity. And, if you don’t have managed accounts, keeping track of investment performance and switching investment strategies accordingly across various accounts could prove difficult.

Have more questions about retirement? Head to our retirement hub and read our retirement guides to learn more.

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

Sources:

1. https://www.irs.gov/retirement-plans/how-much-salary-can-you-defer-if-youre-eligible-for-more-than-one-retirement-plan
2. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds
3. https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs