Column: Can you have too much money in a 401(k)?

Under current IRS rules, every person holding money in one or more retirement accounts must begin withdrawing some of that money each year starting in the year he turns age 70½.

This may seem like a long time from now based upon your current age, but the planning for this required distribution from these accounts should begin years before that date.

If you have accumulated a large sum of money in your retirement accounts, you might even want to begin this process as early as age 50. That’s because it’s possible that you have too much money in your qualified accounts, which could cause a tax issue during retirement.

Not taking the required minimum payout could cause a penalty of half the amount you should have removed, but did not remove, from your accounts.

Part of this puzzle is that you may have tax liability during retirement if your income from dividends, other income or IRA withdrawals, exceeds $24,000 per year.

The concern here is that tax rates in later years will be higher than they are today. Predicting future tax rates is impossible. Given the national debt today, this is a very real possibility.

To reduce this tax liability in retirement, it may be wise to begin withdrawing funds from your qualified accounts long before you reach the required distribution.

A person who has more than $300,000 in qualified money at age 50 should see a financial advisor to calculate what the expected required distribution would be at age 70½. Remember that after 20 years of investing, your $300,000 could easily become $600,000 or even well over $1 million if you made wise investment decisions.

If, for example, you have $600,000 sitting in your accounts at age 70, you would be required to withdraw $21,897 in the first year of distribution. This might not be a big deal unless your growth on that account exceeds the minimum distribution.

Those of you who were brave enough to be in the stock market the past 24 months probably made a return that could be in the range of 5 to 35 percent. If your money was sitting in a savings account at the bank, your return was probably less than 1 percent.

At age 76, if you still have $600,000 in qualified money, your minimum distribution would be $27,272. This would put you into a taxable situation under current rules. Your growth each year would require you to continue to withdraw increasing amounts of money, increasing your tax liability.

For this reason, some individuals will need to begin withdrawing funds from their accounts at a much earlier age. You can make these withdrawals prior to age 59½ without penalty.

As stated earlier, always discuss these issues with a financial advisor before taking any action.

Mark R. Wade is vice president of Bankers’ Bank of Carmel, located at 716 Adams St., Suite B. He can be contacted at MWade@bankersbankusa.com.

  • Harvey Smith

    In any case, I think that having too much money in retirement savings can’t be a problem. The most important is to follow recommendations and start withdrawing money when it’s necessary to avoid penalties. There are rules everyone should follow so don’t waste the moment when you should make steps concerning your savings managements. When people don’t have any retirement savings is much bigger problem than having too much money in your 401k. Some people find different excuses for not saving money and most likely will apply to Personal Money Service in senior ages. It’s a big problem and it’s important to do your best to provide your old ages.