Can You Contribute Too Much To Retirement?

I’m in my early 40s and my wife and I seem to be on track to reach our retirement net worth goal with a paid-off mortgage before our 50s barring any major market correction. When I look at our distribution of liquid assets, it turns out that we have 75% contributed to retirement accounts (IRA, 401s, 403s etc.) and 25% in taxable accounts.

So, if we were to retire early, i.e. before 59.5, we wouldn’t have access to most of our money. That means at least one of us would have to continue to work at least part-time until we can unlock that money. I guess then the answer is yes, you can and we did contribute too much to retirement!

Now there are some ways we can around this:

  • Withdraw Roth Contributions – Contributions made to a Roth IRA or Roth 401(k) can be withdrawn at any time without a penalty. However, since we’ve held our Roths for a long time and our Roth dollars are less than traditional dollars, that doesn’t help much. Also, I’m not yet sure how I’ll figure out how much of my Roth is contributions and how much is earnings.
  • SEPP Plan – You can take distributions from retirement accounts without penalty using “Substantially Equal Periodic Payments”. However, the withdrawal limits are very low. For example, the current max you can withdraw is approximately $35,000 per million.
  • Stop Further Contributions to Retirement – This is exactly what I’ve done for now. I’ve changed my contributions to Retirement accounts to nearly 0. My wife currently is continuing contributing to hers for the time being but we plan to adjust that down too.

As you can see, all those options have cons and are not ideal. So if you are early in your career, and think you might be able to retire before 59.5, here are some things to consider

  • Balanced Contribution to Retirement/Not Retirement – Save money in both retirement and taxable accounts. Don’t max out retirement contributions until you are also saving enough in taxable accounts.
  • Roth/Traditional balance – Traditional IRA/401 contributions reduce your taxable income but Roth contributions can be withdrawn at any time in addition to the other Roth advantages. So, contribute a balance between those.

So if you are blindly maxing out retirement contributions because conventional wisdom told you so, you might want to rethink that some. Also, you might want to rethink Betteridge’s Law of Headlines.

Leave a Reply

%d bloggers like this: