Is It Possible to Save too Much for Retirement?

You want to take full advantage of your tax-advantaged accounts like a 401k or Traditional IRA to minimize how much hard-earned money you must give up. However, some people may be hesitant to contribute more to their retirement accounts because they expect high fees to access their money before 59.5 years old. You may be leaving significant earnings potential on the table by doing so, but some would rather the freedom to access their money without worrying about fees.

This brings me to the question, would we ever regret contributing too much to our tax-advantaged retirement accounts, and what strategies exist to access the money earlier?

Full disclosure, while I enjoy writing about personal finance, I advise that you talk with a professional if you plan to execute any of the strategies discussed in this article.

The Benefits of a Tax-Advantaged Retirement Fund

If you’re interested in keeping more of your money as you approach tax return time (or opportunities to increase your refund), you should be contributing to a tax-advantaged retirement fund such as an employer-provided 401k or Traditional IRA.

To put it into perspective, if you earn $60,000 per year, and elect to contribute 5%, you are investing $3,000 annually into your retirement savings. Ideally, this includes employer contributions as well. Income over $40,126 in 2020 for individual filers is taxed at 22%. Therefore, even with the standard individual deduction of $12,400, this contribution saved you $660 in taxes.

If you bump up your contribution to 15%, you are now contributing $9,000 and saving $1,980. All you are doing is saving your money pretax versus stashing in a separate account after paying taxes on the same income. Not to mention you will earn interest tax-free until you withdraw the money later in life.

Reasons Why People Don’t Contribute More

Advantages aside, you may have numerous reasons for holding back a higher contribution. For one, it’s critical to make sure you have saved up an emergency fund so don’t risk pulling investments when the market is low and get stuck paying early withdrawal penalties to cover an unexpected expense.

Another reason is that you may be concerned about a market downturn. If this is causing you to hold back, consider the long-term benefit and ability to stay invested through a downturn. Assuming you hold your investments, you will catch the upswing when it comes. Considering reading more about the importance of investing during a downturn.

Many of us have debt to pay off, and if you’re holding back on maxing out your contributions, I recommend you read about my experience paying off student loans while saving for a house and starting my retirement savings. While in some cases you may want to pay off debt first, you could be missing out on future earnings and tax savings while rushing to pay off a 0% interest rate loan.

If you’re younger in your career like I am, you may not want to see your funds tied up for the next 30+ years. For myself, this was a big consideration when I first started investing. I’m relatively frugal, and if I contributed the max allowable starting in my late 20s until I am 65, I will have more money held up in my 401k and I may regret not having access to those funds in my 50’s or even 40’s. Does that mean that I should invest outside of my tax-advantaged accounts so that I have access to the money sooner without penalty? This is where I learned about the Roth IRA Conversion Ladder which is a strategy many high savers will use.

What is a Roth IRA Conversion Ladder?

The Roth IRA Conversion Ladder was a game-changer for me as I consider my retirement account contributions. Once I executed my plan to pay down my student loan debt, the Roth IRA Conversation Ladder raised my confidence that investing through my 401k was the best path for me. I had just spent the last 8 years shelling out $1000+ a month for student loans, and I wanted to redirect that money before it was reallocated to lifestyle creep.

This strategy is popular within the F.I.R.E. community (Financial Independence, Retire Early). For people who have a high savings rate and invested significantly for retirement, they wanted a way to access that money sooner if and when they walked away from their traditional 9-5.

So what is the Roth IRA Conversion Ladder? If you are familiar with a Roth IRA, you can pull contributions from this account since they were paid after tax. Note you can withdraw the contributions only and not the money you have earned in the account.

There are some conditions when a 5-year rule applies, such as (1) when you wish to withdraw the earnings, (2) if you converted from a traditional IRA to a Roth, or (3) if someone inherits the Roth IRA. Not waiting 5 years could result in paying penalties, which are ideal to avoid.

How does this apply if you have front-loaded your 401k contributions and now want to access them before retirement? Once you retire, you take your 401k and roll it over to a Traditional IRA (both are pretax dollars). Assuming you’ve nailed down your annual expenses, you would then convert your annual expenses for one year from your Traditional IRA to a Roth IRA. Once you have waited five years, you can withdraw the contributions penalty-free. Every year you repeat the same process and you will always have funds available the following year to cover your annual expenses.

Note that there are specific rules to meet the 5-year rule criteria, so highly recommend you speak to a professional if you plan to execute this strategy for yourself. Also, since the Roth IRA is after-tax contributions, you should plan to pay taxes when you convert from the Traditional IRA to the Roth IRA, but know that you won’t pay taxes when you withdraw from the Roth IRA.


Let’s take Tom who has been contributing $1,000 per month into his 401k since starting his first job at 25. After working 25 years, Tom is 50 years old, and assuming a 7% return on his investments, he has now accumulated over $780,000. Using the 4% Rule, Tom could now be financially independent, assuming his living expenses are less than $31,200 a year.

Since Tom is under 59.5, he can’t pull from his 401k penalty-free just yet. However, if Tom decides he wants to retire early and access these funds, he can roll over his 401k to a Traditional IRA and start the conversion ladder. Note that once he converts the first sum of $31,200 to a Roth IRA he won’t be able to withdraw these funds for another 5 years (remember there are specific rules for calculating the 5-year rule). Each year, Tom will convert an additional $31,200 for his living expenses to the Roth IRA so that 5 years later he can access his money penalty-free.

If you’re a saver, you might be wondering if you should frontload your account now. Are you going to hit your target sooner and regret not having access to your funds before you’re 59.5? While investing outside of your tax-advantaged accounts could allow this, you may be missing out on your company match and some significant earnings potential while lowering your taxable income.

Questions to Consider

  • Have you calculated your retirement portfolio goal?
  • When do you plan to retire and will you reach that goal before 59.5?
  • Are you planning to work until you are 59.5?
  • Are you considering a different path before you retire such as starting your own business?
  • What is your savings rate and could increasing it allow you to retire sooner?

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