Coordinating Employer Plans and IRAs

Most workers accumulate multiple retirement accounts over their careers. Each job change often means a new 401(k) or 403(b), and many people also contribute to IRAs. Understanding how these accounts work together helps you maximize tax benefits and avoid costly mistakes.

401(k) and 403(b) Basics

Employer-sponsored retirement plans allow you to save directly from your paycheck before taxes (traditional) or after taxes (Roth). Many employers also provide matching contributions.

2024 Contribution Limits

Important note: The $23,000 employee limit applies across all your 401(k) and 403(b) accounts combined. If you have two jobs, you cannot contribute $23,000 to each plan.

Key Features of Employer Plans

Advantages:

• Higher contribution limits than IRAs
• Employer matching (free money)
• Automatic payroll deductions
• Potential for Roth 401(k) option
• Creditor protection under federal law

Limitations:

• Investment choices limited to plan menu
• May have higher fees than IRAs
• Less flexibility for withdrawals
• Administrative complexity varies by employer

Traditional IRA Basics

Individual Retirement Accounts offer tax advantages outside of employer plans. Anyone with earned income can contribute to a traditional IRA, but the tax deduction depends on your income and whether you have an employer plan.

Traditional IRA Deduction Limits (2024)

If you ARE covered by an employer plan:

If you are NOT covered but your spouse IS:

If neither spouse has an employer plan: Full deduction available at any income level.

Roth IRA Income Limits (2024)

Rollover Options: Moving Retirement Money

When you leave an employer, you have four options for your 401(k) or 403(b):

1. Leave it in the old employer's plan (if allowed)
2. Roll it to your new employer's plan (if they accept rollovers)
3. Roll it to an IRA
4. Cash it out (usually a bad idea due to taxes and penalties)

Direct vs. Indirect Rollovers

Direct rollover (trustee-to-trustee):

• Money transfers directly from old plan to new account
• No taxes withheld
• No time limit concerns
• Preferred method for most situations

Indirect rollover (60-day rollover):

• You receive a check (minus 20% mandatory withholding)
• You must deposit the full original amount into new account within 60 days
• You must replace the 20% withheld from other funds
• Miss the deadline and it becomes a taxable distribution

Example of indirect rollover problem:

If you only deposit the $80,000 you received, the remaining $20,000 is treated as a distribution, subject to income tax plus a 10% early withdrawal penalty if under age 59½.

The 60-Day Rule

You have exactly 60 days from receiving funds to complete an indirect rollover. This deadline is strict:

• Weekends and holidays count
• The IRS rarely grants extensions
• One rollover per 12-month period for IRA-to-IRA transfers

Best practice: Always request a direct rollover to avoid these complications.

When to Roll Over vs. Keep in Employer Plan

Reasons to Roll Over to an IRA

Reasons to Keep in Employer Plan

Special Consideration: The Age 55 Rule

If you leave your employer during or after the year you turn 55, you can withdraw from that specific 401(k) without the 10% early withdrawal penalty. This rule does not apply to IRAs (where you must wait until 59½) or to 401(k)s from previous employers.

Worked Example: Consolidating 3 Old 401(k)s into an IRA

The Situation

Jennifer, age 45, has retirement accounts from three previous employers plus a current 401(k):

Decision Process

Step 1: Evaluate current 401(k) Jennifer's current employer plan has good investment options and reasonable fees. She decides to keep contributing here for the employer match.

Step 2: Evaluate old 401(k)s

• Company A: High fees, limited investment options
• Company B: Moderate fees, decent options but no ongoing relationship
• Company C: Very high fees, poor investment menu

Step 3: Choose IRA provider Jennifer selects a low-cost brokerage offering index funds with 0.03% expense ratios.

Step 4: Calculate potential savings

Execution Steps

Week 1: Open IRA Jennifer opens a traditional IRA at her chosen brokerage (10 minutes online).

Week 2: Initiate rollovers She contacts each old 401(k) provider and requests direct rollovers to her new IRA:

• Company A: Provides rollover form, requires medallion signature guarantee
• Company B: Handles request by phone, check mailed in 5 business days
• Company C: Online rollover request, funds transferred electronically

Week 3-4: Complete transfers All three rollovers complete. Jennifer's new IRA balance:

Week 5: Invest funds Jennifer allocates her IRA to a simple three-fund portfolio:

• 60% Total Stock Market Index ($87,000)
• 30% International Stock Index ($43,500)
• 10% Total Bond Market Index ($14,500)

Results

20-year impact of fee savings: Assuming 7% returns, the $1,115 annual fee savings compounds to approximately $48,000 in additional retirement wealth over 20 years.

Coordination Strategies

Priority Order for Retirement Contributions

1. 401(k) up to employer match - Never leave free money on the table
2. Pay off high-interest debt - Credit cards, personal loans
3. Max out Roth IRA (if eligible) - Tax-free growth
4. Max out 401(k) - Additional tax-deferred savings
5. After-tax 401(k) (if available) - Mega backdoor Roth option

Tracking Multiple Accounts

Maintain a simple spreadsheet or use account aggregation tools to track:

• Account balances
• Contribution amounts and dates
• Beneficiary designations (review annually)
• Fee levels
• Asset allocation across all accounts

Retirement Account Coordination Checklist

• List all retirement accounts (current and old employer plans, IRAs)
• Note the balance and annual fees for each account
• Verify you're contributing enough to get full employer match
• Check if you're eligible to deduct traditional IRA contributions
• Verify Roth IRA income eligibility
• Evaluate each old 401(k) for rollover decision
• Compare fees between employer plans and IRA options
• Consider age 55 rule if between ages 55-59
• Request direct rollovers (not indirect) when consolidating
• Update beneficiary designations on all accounts
• Review asset allocation across all accounts combined
• Keep rollover documentation for tax records