Can I Contribute to Two 401(k) Accounts?

A 401k can lower your tax bill.

Putting money into a 401k can be an effective way to save for the future, The money you put into a 401k is deducted from your taxable income, giving you an immediate savings as well as a long term benefit. If you work at more than one job, you may be able to contribute to a 401k at each company, which can help you make the most of your retirement savings.

Working Two Jobs

If you work two jobs and both offer 401k plans, you can contribute to both plans to the extent that you are able. You do need to be aware of the contribution limits imposed by the IRS and be careful not to exceed them. For 2011, you can contribute up to $16,500 to a 401k, plus an extra $5,500 if you are 50 or older. Those figures are not per 401k. They are per year. So if you have two plans, the combined total of your contributions cannot exceed that $16,500 or $22,000 limit.

Company Specific Limits

While you can contribute a combined total of up to $16,500 to your two 401k plans, limits imposed by the companies you work for might prevent you from making that maximum contribution. For instance, some companies limit their workers' 401k plan contributions to 15 percent of their salaries, making it hard for moderate and high income earners to maximize their retirement savings. Companies are also not required to allow catch-up contributions. If you face such limits at one or both of your jobs, you can still contribute as much as you are able, then use any excess cash flow to fund other investments.

Catch-Up Strategy

If you participate in only one plan that does not allow for catch-up contributions, then you will not be able to contribute more than the lesser of $16,500 or the maximum allowed under the plan. However, if you participate in two plans, and you are over age 50, your maximum allowable contributions for both plans is $22,000 as opposed to $16,500. Consequently, as the IRS points out, if you participate in two plans you could make the maximum contribution of $16,500 under one plan and use the other plan for catch-up contributions, even if the plan document doesn't include that provision.

Excess Contributions

If you do accidentally contribute too much to your two 401k plans, you only have until April 15 of the following year to notify the appropriate 401k administrator of the excess deferrals and ask that those contributions be returned to you. When you notify the administrator of the excess 401k contributions, it must return those contributions, plus any applicable earnings, to you by April 15 of the year following the year when those contributions were made. Excess contributions not removed will be taxed as income. In addition, the IRS points out, the taxable portion will still be taxed as income when you begin taking distributions from the plan, so you could actually be taxed twice on that amount.

References

• IRS: 401k Resource Guide
• The Money Alert: 401k and IRA Contribution Limits