What to Do If You Save Too Much for Retirement: It’s entirely possible to save too much — at least according to the IRS.

Nerdwallet via Yahoo finance ^ | 06/10/2021 | Liz Weston

[SeekAndFind]

Many Americans don’t save enough for retirement, but it’s entirely possible to save too much — at least according to the IRS.

Tax laws limit how much you’re allowed to contribute to retirement accounts, and excess contributions can be penalized. Uncle Sam doesn’t want you to leave the money in the account too long, either. Those who fail to take enough out of their retirement accounts also face heavy penalties.

Here’s what you need to know to stay on the right side of the IRS’ rules.

Overstuffing your retirement accounts

Not everyone is allowed to contribute to retirement accounts. Contributions to an IRA or Roth IRA require you or your spouse to have “earned income” such as wages, salary, bonuses, commissions, tips or self-employment income. Pension payments, Social Security benefits, rental income and interest and dividends don’t count. Also, the ability to contribute to a Roth phases out at modified adjusted gross incomes between $125,000 and $140,000 for single filers, from $198,000 to $208,000 for married couples filing jointly.

People may not realize that the annual limit on IRA contributions — $6,000 for 2021, plus a catch-up contribution of $1,000 for people 50 and over — is the cap for all IRA accounts. In other words, you can’t contribute $6,000 to a traditional IRA and another $6,000 to a Roth IRA in the same year.

You also can contribute too much to a workplace plan such as a 401(k), especially if you change jobs during the year. Your new employer won’t know if you’ve already made contributions to your previous employer’s plan that would count toward the annual limits (typically $19,500 for 2021, plus a $6,500 catch up contribution for people 50 and older), says tax expert Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting.

[SeekAndFind]

Even if you don’t change jobs, your 401(k) contributions could be capped if you’re deemed a “highly compensated employee.” That can happen if not enough lower-paid workers contribute and you own more than 5% of the company, earn more than a certain amount (currently $130,000) or are among the top 20% of employees ranked by compensation. Your excess contributions will be sent back to you as a check or other payment.

How to limit the damage

But usually it’s up to you to discover and fix an excess contribution. If you catch the problem soon enough — before you file your tax return for that year — you can limit the damage by withdrawing the excess contribution, says financial planner Robert Westley, a member of the American Institute of CPAs’ Financial Literacy Commission. You would also need to withdraw any earnings attributable to that contribution.

The withdrawal will be taxed as income. If the money came from an IRA, you may owe a 10% early withdrawal penalty on earnings if you’re under 59 ½, Westley says.

If you miss the tax deadline, a 6% penalty could apply for each year the excess contribution remains in the IRA. An excess 401(k) contribution can trigger double taxation: The excess contribution and earnings are taxed when they’re withdrawn, but the contribution is also added back to your taxable income for the year you made the contribution, Westley says. Contact a tax professional to discuss your options.

The heavy penalty for not withdrawing enough

[glorgau]

These sorts of things are termed “first world problems”.

[DIRTYSECRET]

My plan: Unlimited pre-tax contributions to an IRA/401k until one reaches $500k. Everyone can see that millionaire light at the end of the tunnel. Perfect for 40-and-under millennials. Watch the participants become conservatives.

A fair tax(consumption) would allow for it. No taxes on investments.
Bingo.

[cuban leaf]

These sorts of things are termed “first world problems”.

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;)

Thanks to a divorce 24 years ago and the subsequent complete loss of faith in our system, I don’t have to worry about this. ;)

My savings is not under the Fed’s radar. It’s not illegal. It’s just the type of stuff they can’t really hurt you with. Stuff like real estate (raw land).

[taxcontrol]

I am of the opinion that the “cap” should only apply to tax deductable contributions. You should be able to contribute more, but not receive the deduction for the amount over the cap. There should NOT be any penalty for “stuffing” your retirement account.

I am also of the opinion that the cap should not apply AT ALL, if the total amount of the retirement plans is less than two million.

[DCBryan1]

Also, if you have "too much money" you can gift TAX FREE up to $15,000.00 per person (30k husband/wife) to your children, an LLC (not to yourself), a charitable trust, etc.

If you REALLY, REALLY have too much money, you can give a one time amount of over $11,000,000.00, of course, of which, you will be calling me as your broker. ....and Biden wants to lower that to $1,000,000.00.....which will destroy farms and small businesses as their fields, crops, livestock, equipment, and brick and mortar stores are worth more that 1mm today.

Source: https://smartasset.com/retirement/gift-tax-limits

[lgjhn23]

No matter how hard the working man tries, they see to it that he and his family will NEVER make any real money...

[DIRTYSECRET]

The faster one gets to their half a million nest egg the more they’ll gain in their lifetime. Could make them lazy while their investments are on auto pilot but then the younger workers would be busting their butts.

[CodeToad]

“These sorts of things are termed “first world problems”.”

So? Seems what that phrase really says is “white people problems”. I’d rather not have “black people problems”.

[Magnum44]

Yep, my financial adviser likes to say having too much income is a problem we can all live with.

That said, you do want to minimize tax over the long haul. The article points out limits to IRA and 401K contributions. One should also be aware of the ability to roll over non-Roth to Roth for significant long term tax savings (at the expense of paying the tax now on the withdrawal from the non-Roth).

[SaxxonWoods]

Most saving for retirement should not be done in retirement accounts, imo. Diversified real estate and stocks are much better in the long run.

I say this after being retired for 12 years.

[Vigilanteman]

Another weird feature is limiting you to $6000 on an IRA ($7000 if over 50) but $19,500 ($26,000 if over 50) on a 401(K).

It would be far better just to simplify the maximum to $25,500/$33,000 without regard to the particular instrument . . . and far less discriminatory against the self-employed as well as less favorable to government workers (and the remaining few with non 401(K) pension plans).

[where's_the_Outrage?]

I retired early using money I saved, which means I had minimal income. When I turned 59 1/2 I took $70K from my IRA, had zero tax liability. I continued yearly to remove from my conventional IRA and then change to roth, again at zero tax liability.

Hope to continue this strategy until age 70 when I’ll cash out as much of my convention IRAs as I can without incurring income tax.

Working well so far, except last year I took a little too much and incurred a $300 tax liability. Hard to judge with tax laws being a moving target.

[TurkeyLurkey]

Pretty fundamental I think:

Our bank sends a notice at the beginning of a year telling the retiree exactly how much he/she “has” to withdraw from his/her IRA; they send a copy to the IRS.

As far as deposits before the mandated withdrawal period, the bank will let people know how much the IRS limits deposits per year too.

[redgolum]

Good problem to have.

[a fool in paradise]

does not apply to billionaire globalists

[cuban leaf]

Could make them lazy while their investments are on auto pilot but then the younger workers would be busting their butts.

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Isn’t that the way it’s always been? ;)

I remember when I was in my late 20’s in IT and we had a word for the old timers: LIFER - Lazy, Inefficient, F*** off, Expecting, Retirement.

And now I am definitely one of them. However, I learned that we are not inefficient. Rather, we can do as much work in one hour as the young guys can in 8, and we make better decisions, and make them much easier.

But still, since I’m planning on retiring any day, I am not a very good morale booster. It’s not much of a problem because we’re all WFH for the last year. I would have retired sooner but this makes collecting those weekly golden eggs WAY too easy. The day they end WFH is the day I retire.

[SamAdams76]

Also, if you have "too much money" you can gift TAX FREE up to $15,000.00 per person (30k husband/wife) to your children

I think I learned that while watching the Shawshank Redemption!

Seriously though, I've spent much of the past year reading up on all these retirement "catches" and regulations as I'm finally coming into the part of my life where retirement is a viable option.

There is a lot to know!

[Honest Nigerian]

Biden has opined - there are certain categories of people who are not sophisticated enough to hire experts to help with these “problems”.

[GOPJ]

Everything we want to ‘dismiss’ in others is dubbed a ‘first world problem’.

Your child dies but a slum dweller in some hellhole had three children die so your feelings of loss don’t count? It’s stupid liberal ‘elite’ bullsh*t.