Yes, you read that right.
How is that possible?
First a little background knowledge…
When you turn 72, Uncle Sam requires you to withdraw money from your 401k. He doesn’t care if you actually need the money or not.
And when you withdraw that money, you’ll pay income taxes on the total.
It’s called a Required Minimum Distribution (RMD).
The IRS does that because you’ve never paid taxes on that money before and they needsta get paid!
Uncle Sam is FORCING you to pay taxes.
If he forces you to withdraw more than you need, then you’ve overfunded your 401k and your paying taxes you didn’t need to.
How to avoid it
RMD’s only apply to pre-tax retirement accounts.
Money that’s in a regular, old brokerage account doesn’t pay income taxes on withdrawals.
So a smart passive income strategy starts with knowing the most tax-efficient places to withdraw the money from and planning your savings around that.
That puts you in control of how much you pay in taxes when you’re living off your savings.
How much is too much?
We forecast RMD’s for our members, but it’s too complicated a calculation for FZ Daily.
But generally speaking, if you “only” contribute the maximum ($20,500 in 2022) and your employer gives a normal match of 6%, then you should be okay.
When we see people on a path to overfunding, it’s most often because their employer gives them MUCH more than just a 6% match.
That said, it’s also possible to overfund if your living expenses (and therefore passive income needs) are extremely low and you’ve been maxing out your 401k.
In either scenario, the only way to know is to run the numbers.
Most people don’t need to worry about this, but if you’re NOT one of most people, then keeping this in mind could save you over 6 figures in taxes over your lifetime.
