Yes, you heard that right.
It’s possible to save TOO much in your 401k.
To be clear, that only becomes a concern after many, many years of maxing out your pre-tax 401k contributions.
It’s not a problem the typical American needs to worry about, but YOU’RE a Financial Zen Master, so YOU do.
How’s this possible?
3 words: required minimum distributions.
That’s IRS talk for “pay me!”
When you hit a certain age (right now it’s age 73), Uncle Sam is going to REQUIRE you to take a MINIMUM amount of money out of your pre-tax 401k as a DISTRIBUTION.
Why? Because you haven’t paid any taxes on that money yet and Uncle Sam is tired of waiting.
So he makes you add up all the pre-tax money you have and divide it by a predetermined denominator. That’s the RMD you’re forced to take out of your 401k and pay taxes on.
What if you don’t need the money? Too bad! He doesn’t care if you need it or not.
If your RMD is more than you need for passive income, then you’ve overcontributed.
The way to get in front of it is to forecast how big your 401k will be, vs. how much passive income you’ll need.
If you’re on track to OVERSAVE, then it might make sense to divert your pre-tax 401k contributions to Roth 401k contributions.
This is a “talk to a professional” moment. Have a pro run the numbers for you (or at least check your math) before you reroute to a Roth.
