How Many Retirement Accounts Should I Have?

Retirement planning involves navigating various account types and aligning them with personal financial objectives. This article clarifies the considerations for building a robust retirement savings strategy.

Understanding Available Retirement Account Types

Employer-sponsored plans, such as a 401(k), are retirement savings vehicles. Employees contribute a portion of their pre-tax income, which grows tax-deferred until withdrawal. Many employers also provide a matching contribution. Other employer-sponsored options include 403(b) plans for certain non-profit organizations and the Thrift Savings Plan (TSP) for federal government employees.

A Traditional IRA offers individuals a way to save for retirement independently. Contributions may be tax-deductible in the year they are made, depending on income and whether the individual is also covered by a workplace retirement plan. Funds within a Traditional IRA grow tax-deferred.

The Roth IRA operates with a different tax treatment. Contributions are made with after-tax dollars, meaning they are not tax-deductible. Qualified withdrawals in retirement, including all earnings, are completely tax-free, providing tax diversification for future income.

A Health Savings Account (HSA) serves as a savings account for healthcare expenses, and can also function as a long-term retirement savings vehicle. HSAs are available to individuals enrolled in a high-deductible health plan. Contributions are tax-deductible, the funds grow tax-free, and qualified withdrawals for medical expenses are also tax-free. After age 65, funds can be withdrawn for any purpose, subject to income tax if not used for qualified medical expenses, similar to a Traditional IRA.

Factors Determining Your Account Strategy

Employer-sponsored plans, such as a 401(k), are often the initial step in a retirement savings strategy. Utilizing these plans, especially when an employer offers matching contributions, can boost overall retirement accumulation.

Income levels determine eligibility for certain retirement account benefits or contributions. An individual’s Adjusted Gross Income (AGI) can affect whether Traditional IRA contributions are tax-deductible. Similarly, income limitations restrict who can directly contribute to a Roth IRA, potentially leading higher-income individuals to explore alternative contribution methods or other account types.

Self-employed individuals have distinct retirement savings options. Options such as a Simplified Employee Pension (SEP) IRA or a Solo 401(k) allow self-employed individuals to contribute a larger percentage of their net earnings than a standard IRA. These specialized plans enable substantial tax-deferred savings for business owners and independent contractors.

Tax diversification in retirement motivates holding multiple account types. Having both pre-tax accounts, like a Traditional 401(k) or IRA, and after-tax accounts, such as a Roth IRA, provides flexibility in managing future tax liabilities. This strategy allows retirees to draw from different tax buckets depending on their income needs and prevailing tax rates, mitigating future tax uncertainties.

Coordinating Contributions Across Accounts

Annual contribution limits for various retirement accounts are set by the Internal Revenue Service (IRS) and apply independently to different types of accounts. For example, the maximum amount an individual can contribute to a 401(k) in 2025 is $23,000.

Separate from the 401(k) limit, individuals can also contribute to an IRA. The combined limit for contributions to Traditional and Roth IRAs is $7,000 in 2025. This means an individual can contribute up to $7,000 across their Traditional and Roth IRAs, but this does not reduce their separate 401(k) contribution capacity.

Individuals aged 50 and over are eligible to make additional “catch-up” contributions. For 2025, the catch-up contribution limit for 401(k) plans is an additional $7,500. Similarly, individuals aged 50 and older can contribute an extra $1,000 to their IRAs.

Strategically allocating savings to maximize contributions across all eligible accounts involves prioritizing employer-sponsored plans first, especially if an employer match is available. After securing any employer match, individuals might then consider contributing to an IRA, choosing between Traditional or Roth based on their current tax situation and future tax expectations. Any remaining savings can then be directed back to the employer-sponsored plan up to its maximum limit, or to other savings vehicles like an HSA, if eligible.

Managing Multiple Retirement Savings

Consolidating retirement accounts can simplify management, especially when individuals change employers. A common practice is rolling over a 401(k) from a previous employer into a new employer’s 401(k) or into an IRA. This process involves directly transferring funds from one qualified retirement plan to another without incurring immediate taxes or penalties. Such rollovers help in maintaining a consolidated view of retirement assets and reducing administrative complexity.

Properly designating beneficiaries for each retirement account is important for estate planning. Beneficiary designations on retirement accounts supersede instructions in a will, meaning the funds will pass directly to the named individual(s) upon the account holder’s death. Regularly reviewing and updating these designations ensures that assets are distributed according to current wishes and helps avoid potential delays or disputes for heirs.

When accessing funds in retirement, specific rules apply based on the account type. For pre-tax accounts like Traditional 401(k)s and Traditional IRAs, individuals are subject to Required Minimum Distributions (RMDs) once they reach age 73. These rules mandate that a percentage of the account balance must be withdrawn annually, and these withdrawals are taxed as ordinary income.

Roth accounts, including Roth IRAs, offer different withdrawal considerations. Qualified distributions from a Roth IRA are tax-free, provided conditions are met, such as the account being open for at least five years and the owner being at least 59½ years old. Roth IRAs do not have RMDs for the original owner during their lifetime, providing flexibility in managing tax liabilities in retirement.

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Citations

https://www.irs.gov/retirement/retirement-plans-key-numbers
https://www.irs.gov/retirement-plans/plan-participant-employee/required-minimum-distributions
https://www.irs.gov/retirement-plans/roth-iras-are-they-for-you