You know you ought to save for retirement, but where you should put your savings isn't always as obvious. IRAs, HSAs, and 401(k)s are just a few of the many choices out there, and a lot of people end up with more than one of these. But there's a fine line between too few retirement accounts and too many. In this article, we'll look at how to choose where to keep your savings.
The drawbacks of a single retirement account
Having a single retirement account makes it easy to see what you have, but it limits your ability to invest how you want. If you keep all your savings in a 401(k), for example, then you're restricted to whatever investment options your employer makes available to you. These might be expensive, and they might not line up well with your long-term goals.
Sticking to a single retirement account also means you're locked into paying taxes on all your savings at a certain time, whether that's right away when you make your contributions or later when you withdraw the money in retirement. This isn't always a problem, but in some cases, you could end up owing the government more of your savings than you would've if you'd stashed your money in a retirement account taxed the other way.
Finally, you may not be able to save as much as you'd like for retirement with one account. All retirement accounts have annual contribution limits, and exceeding these can result in costly penalties. If you have only one retirement account, you have to stop saving once you hit this cap, even if you have more money you want to set aside.
The drawbacks of too many retirement accounts
Hopefully it's now clear that having one retirement account can be too restrictive, but having too many retirement accounts can make managing your savings much more challenging.
The obvious issue is that it becomes difficult to know what you have when your money is spread across a half dozen or more retirement accounts. When setting up a new one, you might forget what you have invested in some of your other accounts. This could lead to you exposing yourself to too much risk in a certain area.
Some people even forget about some of their retirement savings altogether when they have too many retirement accounts. This happens sometimes if people leave their old 401(k) where it is when they quit their job instead of rolling it over into their new 401(k) or an IRA. If this happens enough times, it can become difficult to keep track of where all your savings are, especially if your 401(k) plan administrator changes after you've left the company.
Leaving a bunch of 401(k)s with all your old employers can also cost you a lot more than necessary. If these 401(k)s have high fees, you can save by rolling them over into an IRA rather than leaving the money where it is.
So how many retirement accounts should you have?
There isn't a hard-and-fast rule for how many retirement accounts you should have. It really comes down to being strategic.
For example, you might start out with a 401(k) through your workplace. This is often a smart place to stash your savings, especially if your employer offers a company match. But if you max that out, you might want to open an IRA so you can contribute even more money to your retirement savings this year. Then, if you later quit that job, you can roll your old 401(k) funds over into that IRA so you can better manage your money in one place.
Similarly, if all your retirement accounts are tax-deferred -- meaning your contributions to them reduce your taxable income this year, but you owe taxes on your withdrawals -- you might consider adding a Roth IRA if you want some savings you can access tax-free in retirement.
Basically, you should add a retirement account if you believe it will offer some benefit, like better tax savings or investment options, that your existing account(s) don't. And you should consolidate retirement accounts if they don't offer any unique benefits; that way you can more easily manage your funds in one place.
If you haven't thought about this before, now's a great time to evaluate your current retirement savings strategy and look for ways to streamline it. Having the right accounts at your disposal can make reaching your goals much easier.