Managing your financial future as a medical professional often involves balancing multiple sources of income—and sometimes, that means juggling multiple 401(k) accounts. Whether you work for multiple employers, have a side business, or work as both an employee and independent contractor, understanding how to manage your 401(k)s is essential to optimizing your retirement savings.
The good news? You can have multiple 401(k) accounts. But there are some rules you need to follow to avoid missing out on important tax advantages and maximizing contributions. Let's dive into the key rules and strategies for handling multiple 401(k) plans.
Yes, you can! Many doctors, surgeons, and other healthcare professionals work for more than one employer, have consulting gigs, or run their own practices. Each of these income streams may come with its own retirement plan. As long as each employer offers a separate plan, you can participate in all of them.
But there are limitations. Specifically, the IRS sets contribution caps that apply across all your 401(k) accounts. Here's a breakdown of the main rules governing these accounts.
For 2024, the IRS allows you to contribute up to $23,000 as an employee to all your 401(k) accounts combined (or $30,500 if you’re 50 or older, thanks to catch-up contributions). This limit applies no matter how many 401(k) accounts you have.
So, if you have two jobs with 401(k) plans, you can’t contribute more than $23,000 across both accounts. You can split your contributions between plans, but the total can’t exceed this limit.
While your employee contributions are capped across all plans, the employer contributions can differ. For 2024, the total annual contribution (including both your contributions and your employer’s) can be up to $68,000 per employer (or $75,500 if you’re 50 or older).
Here’s the kicker: This limit applies per employer, not across all your accounts. That means if you have multiple jobs with unrelated employers, each employer can contribute up to $68,000 to your respective 401(k) accounts.
In the world of 401(k) accounts, "unrelated employers" mean businesses that are not part of the same ownership group. If the businesses you work for are not linked under the IRS’s “controlled group” rules, you can have separate 401(k) limits for each employer.
A controlled group happens when one business owns 80% or more of another business, or if five or fewer people own 80% or more of multiple businesses. In these cases, the businesses are considered related, and the 401(k) contribution limits apply across all related employers, not per employer.
To illustrate how these rules work, let’s look at a few scenarios commonly faced by medical professionals who have multiple income streams and 401(k) accounts.
Imagine a physician who works for two hospitals. Hospital A pays her $220,000 a year and matches 100% of her first $6,000 of 401(k) contributions. Hospital B pays her $100,000 and matches 50% of her first $5,000.
Hospital A 401(k): $6,000 employee contribution + $6,000 employer match = $12,000
Hospital B 401(k): $5,000 employee contribution + $2,500 employer match = $7,500
Remaining Employee Contribution: $12,000 total (from Hospital A and B) leaves her with $11,000 more she can contribute. She decides to add this to the account with the best investment options.
Total Contribution: $23,000 (employee limit) + $8,500 (employer match) = $31,500 across both 401(k)s.
Another common scenario involves a medical professional who is an independent contractor and also owns a small business. As a contractor, she makes $150,000 a year and contributes to her individual 401(k). On the side, she runs a private practice that brings in an additional $100,000.
Independent Contractor 401(k): $23,000 employee contribution + 20% of her net income (self-employment) as an employer contribution.
Side Business 401(k): She can contribute an additional employer contribution, assuming her business qualifies as a separate entity under IRS rules.
By splitting her contributions between both, she maximizes her retirement savings potential.
Changing employers as a medical professional is common. When this happens, it’s important to carefully review your 401(k) accounts. Many employer-sponsored 401(k) plans are not portable, meaning you can’t continue contributing once you leave your job. However, you have a few options:
Rollover into an IRA: This can provide more flexibility and investment options.
Leave the Money in the Old 401(k): This is only advisable if the fees are low and investment options are strong.
Transfer to the New Employer's 401(k): Check if this is an option with your new employer.
Each choice has pros and cons, so consult with your financial advisor or retirement plan expert before making a decision.
When you hold multiple 401(k) accounts, tax planning becomes even more critical. Here’s what to consider:
Employee Contributions: Your pre-tax employee contributions lower your taxable income, which is a significant tax advantage, especially for high-income professionals.
Employer Contributions: These are also tax-deferred until you withdraw the funds in retirement.
Roth 401(k): If you’re using a Roth 401(k), your contributions are after-tax, but your withdrawals in retirement will be tax-free.
The key is to balance tax savings now with future tax efficiency when you begin taking distributions.
For medical professionals with multiple income streams, understanding how to manage multiple 401(k) accounts can help maximize retirement savings. With the right strategy, you can optimize contributions, grow your retirement nest egg, and take advantage of valuable tax benefits.
If you’re unsure about how to manage your 401(k) accounts or maximize contributions across multiple plans, it’s always a good idea to work with a retirement planning expert or financial advisor who specializes in helping healthcare professionals.
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Disclaimer: This article is for informational purposes only and does not constitute financial, legal, or tax advice. Medical professionals and other readers should consult with a licensed financial advisor or tax professional for personalized advice regarding their specific financial situations.