Make the Most of Retirement Accounts. How Many Can You Have?

These days, people tend to job-hop much more than before. People become dissatisfied more quickly with their jobs, always seeking greener pastures elsewhere. Companies, too, are quicker to lay off employees if company executives believe that layoffs will benefit their bottom line and prop up company share prices. According to the U.S. Bureau of Labor Statistics, the average American holds an astonishing eleven different jobs between the ages of 18 and 44. Granted, jobs one holds while still a teenager may well be summer employment at a fast-food outlet. In any event, at least in American and European companies, any sense of loyalty between employer and employee has eroded substantially.

What does this mean for the benefits that an employee accrues while working for a company, even for just a few years? Most large firms offer some form of retirement plan and more and more a 401(k) rather than a traditional pension plan. If you leave a company, what happens to your 401(k)? Do you simply open a new account at your new company? Can a person have more than one retirement plan?

Indeed, one can have several 401(k)s simultaneously. If you’re moving from one company to another, check what the policy is at the company you’re leaving; if they allow former employees to maintain their 401(k)s, then that might be an option for you. You might consider this if the investment options at your old company are particularly attractive to you. Then simply open a new 401(k) at your new company. But be sure you know all the rules at your former company. You don’t want to pay additional fees, if such fees are assessed on accounts kept in place by former employees.

Rolling Over 401(k) Options

You also have several options for rolling over your existing 401(k) when you leave a company. You can roll your assets over into your new 401(k) at your new company; this is a good choice if the investment options at your new company are attractive, and it keeps things simple. You can roll the assets into an Individual Retirement Account (IRA). Following this strategy, you don’t pay any early withdrawal penalties since you’re moving from one tax-advantaged retirement account to another, and you maintain total control over your assets. However, you can’t take out loans against an IRA as you can against a 401(k). You can withdraw the assets in your old 401(k) in a lump sum, but you will then owe tax immediately on the withdrawal, and you may owe a 10 percent penalty if you withdraw the funds before the age of 59½. Finally, you can roll the funds over into a qualified annuity. The assets will continue to be held tax-deferred, but annuities generally involve higher fees than other forms of retirement accounts.

What about IRAs? You can invest in one or several IRAs in addition to your 401(k), whether regular IRAs, Roth IRAs, or both, but annual contribution limits do not change. As of 2012, investors under the age of 50 could invest no more than $5,000 (for the year) in one IRA account, or spread out over several accounts. (Investors aged 50 and over can invest $6,000 in their IRA account[s]). For most investors, having a single IRA account makes most sense, but there are no restrictions on having several.

What strategy is best? Most investors prefer simplicity over complexity, and having a single 401(k) in addition to a single IRA account is sufficient. However, you may have reasons for maintaining your 401(k) at your old place of employment, or for opening more than one IRA. There’s nothing to prevent you from doing so.