Is it Possible to Have Too Much Money in Retirement Accounts?

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retirement accounts, too much money in retirement accounts, i love compound interest, compound interest, early retirement, FIRETo some people, this may sound like a quick or easy answer. They might say, “I want to have the most amount of money possible in retirement”, so their answer would be “no” to the question. Well, I’d argue that their statement is only partially correct and you may not want all your savings “eggs” in that one “basket”. All of us would say that we want to have as much money as possible in retirement, but having money for retirement and having your money in retirement accounts are two different things.

This is an especially valid question if you plan on retiring early. About 5-6 years ago I had to re-think a few things for my wife and me when we really got serious about planning to retire early. If we retire early (in our 40s or early 50s) and can’t access much of our savings until we’re 59 ½ years old (because it’s in retirement accounts), then there will be a gap of years without access to much needed funds. After that realization, we made a shift in how we invested our funds each year to make sure that we had enough in the non-retirement accounts to be able to fund those years before we can withdraw (penalty-free) from our retirement accounts. Actually, we were still maxing out our 401(k) accounts but we realized that we needed to also stash away significant funds into other accounts that would not have a penalty for withdrawals before a certain age.

I know what you’re probably thinking. Should I still invest in my company’s 401(k) in order to take advantage of their matching? More than likely the answer would still be yes. I’ve blogged about not turning down free money and in many circumstances it is still a great idea. There are few absolutes in finances (at least I don’t think there are), but definitely give serious consideration to your company’s 401(k) matching program since turning down a guaranteed 25, 50 or 100% is going to be hard to beat. Again, each person’s situation is different, so run the numbers and discuss it with financial planner/coach if need be.

So what are your options if you want to retire at 55, 50, or even younger in your 40s or 30s? You could need funds to live off of for anywhere from 5-20+ years until you are old enough to start taking distributions from your retirement accounts without penalty.

Non-Retirement (Taxable Accounts)

One option is certainly to invest in non-retirement accounts (also called taxable accounts). This is just another way of saying that you can invest in a mutual fund (stocks, bonds, ETFs, etc.) that is not within an IRA or within your company’s 401(k). Of course you do have to pay tax each year on any earnings or capital gains distributions that come your way, but the main key here is that you have complete freedom to do whatever you like with those funds at whatever age you like. If you decide you want to retire at 45 years old, buy a Harley-Davidson motorcycle and cruise the open road, you could do that and not have to pay any particular penalties to get your funds, assuming they were in non-retirement accounts.

Roth IRA

What if you have invested a lot of your money into an IRA, can you get any of that prior to age 59 ½? If you have invested in a Roth IRA, the contributions you make are  eligible to be withdrawn without a penalty (after 5 years) since you have already paid tax prior to investing. The catch here is it only applies to your contributions, and not your earnings. Simply speaking, if you had invested $100,000 and now your Roth IRA is worth $175,000, you can take out $100,000 without penalty. There are also some other special circumstances that allow you to withdraw Roth IRA earnings without tax and/or penalty, but we’ll have to cover them in another post.

And if you have a large portion of your savings in a traditional 401(k) or Roth 410(k), you may also have a difficult time accessing your money should you need it for living expenses prior to age 59 ½. The 401(k) guidelines are a bit trickier and slightly less lenient in my opinion when you are under the age of 59 ½. I saw a good blogger go into a very detailed description of some of these rules at (http://www.obliviousinvestor.com/roth-401k-distribution-rules/). But for the info straight from the horse’s mouth (IRS) you can also access their website and guidance as well.

My main point in bringing this topic up is to get us to think and determine if the early retirement path you may be on will allow you to have access to your funds for your living expenses before you turn 59 1/2 years old. Retirements accounts have some amazing features and can be a fantastic component of your overall financial plan, but just be sure that your plan covers all the possible angles you might encounter.

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