More or Less
How many retirement accounts do you have? One? Two? A Brady Bunch-sized collection? (Millennials, look it up.) There is no single right answer. The real question is, “Why?”
Why might you need more retirement accounts…or less?
Let’s start with your job. Without a doubt, if you have access to a workplace retirement account (401(k), 403(b), 457, TSP), this should be your primary savings vehicle for retirement. Yes, this is the account that will allow you to contribute the most in a tax-advantaged way ($23,000 this year, plus an extra $7500 if 50 years old). But the real secret sauce of a 401(k) and its brethren is that contributions are automatic from your paycheck. For that reason, even if you find the investment choices of your plan to not be quite to your liking, or even if your employer does not provide a matching contribution, I still say “Do it!”
But should you also have an IRA in addition to your workplace plan? This is certainly a solid idea if you have reached the maximum in your workplace plan and want to save even more and you have an income below the qualification threshold to use an IRA. Another impetus for having an IRA account in addition to your workplace plan is if your employer does not offer a Roth option and you want to diversify the tax treatment of your retirement savings. But despite all the hype, not everyone needs to have an IRA if they have a workplace plan available to them.
Alright, so now we are at two possible accounts…one at your current place of work and maybe an IRA as well. (For counting purposes, if you make both traditional and Roth contributions to your workplace plan, I consider that as one account.) Should we keep going? In most cases, no.
If you have a retirement account (or several) with a past employer, you need to clean up that situation! If you think keeping track of these accounts is a pain now, just imagine years from now when you are retired and are taking distributions from these accounts. You have two good options here:
Roll it into your current employer plan. This is a perfectly fine option if you are happy enough with the investment selections in your workplace plan. The other advantage of this tactic is that it allows you to take advantage of the so-called “Rule of 55.” (You can take penalty-free distributions from the workplace plan of your final employer at age 55 — not 59 ½.) Fewer accounts, more simplicity, higher Zen quotient.
Roll it into an IRA at the financial institution of your choice. (If you already have an IRA account established for whatever reason, just add to it.)
Either way, you can generally only roll “like to like.” That is, if your old plan is traditional (pre-tax), you can only roll it into another traditional plan or IRA, not a Roth-type plan or Roth IRA. (There actually is an exception here, but let’s not go there today.) Similarly, a Roth account can only be rolled into another Roth. So while you may aspire to having only the single workplace account for retirement, that may not be possible.
In short, if I see someone with retirement accounts housed at more than two locations (one employer plus one financial institution), I will likely question the logic.
But the story would not be complete if I did not include a discussion of a “retirement” account that is not a retirement account. Nowhere is it written that you can only invest for retirement in a tax-advantaged account. Of course, that is economically optimal. But what if you are contemplating an early retirement and want to access your funds earlier than the usual 59 ½ when your IRA becomes available to you? Or perhaps you have the ability to save more than the workplace plan limits but are fortunate to have an income that is too high for an IRA? A plain old taxable investment account is your best friend. (“Taxable” because there are no tax deductions for contributions or tax deferrals or exclusions on earnings.) The purpose is still retirement.
Let’s see…I am now counting three possible accounts: a workplace plan with a current employer, an IRA, and a taxable investment account earmarked for your retirement years. Are we done? If only…
Many people use their Health Savings Account (HSA) as an additional retirement savings vehicle. If you have a high deductible health plan, you also have access to an HSA. Contributions are made pre-tax and earn interest and dividends free of taxes. Withdrawals for medical expenses (possibly decades from now, in your retirement) are tax-free. And finally, once you turn 65, your HSA balance acts like a traditional retirement account; withdrawals are permitted penalty-free (not tax-free) for any purpose.
So, the answer to the question at the top is “At least one, but not more than four.” You have an extra finger left on your counting hand!
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