You May Be Overfunding Your Retirement Plan. Here's When It Makes Sense to Stop.

Many Americans are given the same retirement advice. Max out your 401(k) plan every year. Contribute to an IRA and make catch-up contributions once you're eligible. And repeat.

For many workers, that guidance is absolutely necessary and spot-on. But there's another side to retirement planning that doesn't get talked about often enough -- having too much money in an IRA or 401(k).

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You might assume that's not possible. But at a certain point, funneling every extra dollar into a retirement account may stop working to your benefit. And it's important to know when to hit the brakes on retirement plan contributions and shift your strategy.

Why too large an IRA or 401(k) balance could be a problem

You might think the more money you're able to sock away in an IRA or 401(k), the better. But while it's a good thing to have a robust retirement plan balance, one thing to realize is that traditional IRAs and 401(k)s impose required minimum distributions (RMDs) once you turn 73 or 75, depending on your year of birth.

RMDs don't just force you to take money out of your savings. They can also trigger huge taxes if they're on the larger side. And RMDs could also boost your income to the point where you're taxed on your Social Security benefits and assessed surcharges on Medicare premiums.

You can argue that this is a good problem to have. But it's a problem nonetheless.

Another issue is that IRAs and 401(k)s want you to leave your money alone until you turn 59 and 1/2. And if you take a withdrawal at an earlier age, you'll generally face a 10% penalty.

But if you're a strong saver, you may end up with enough money to retire in your early or mid-50s. So at that point, you could be left with two choices -- work longer even though you don't have to, or lose 10% of your hard-earned money.

How to figure out if it's time to stop

Because so many people are wired to contribute as much as possible to an IRA or 401(k), ceasing to fund your retirement plan might seem like a really uncomfortable thing. But it's important to know when it's time to stop.

One thing it pays to do is use a financial calculator to see how much your IRA or 401(k) might grow between your current age and projected retirement age if you don't add another dollar. As a benchmark, you can plug in a 7% return, which is reasonable since it's a bit below the stock market's average.

As an example, let's say you're 50 and want to retire at 62. Let's also say you have $3 million in a 401(k) now. If you do nothing, and your 401(k) grows 7% annually over the next 12 years, you could be looking at about $6.75 million by the time you're ready to end your career.

That's an amazing thing. But it could also lead to very large RMDs that create a tax headache. So in a situation like this, it could pay to stop funding that 401(k) and instead put extra savings you have into a taxable brokerage account. Your money won't go in tax-free, but you also won't have to take RMDs.

Another exercise to run through is to think about when you actually want to retire. If you're hoping to retire before 59 and 1/2, that's a good reason to stop funding an IRA or 401(k).

And even if you'd ideally like to work longer, think about the industry you're in. If jobs in your field seem to be disappearing quickly and you're only 50, you may end up retiring sooner than planned. At that point, having a chunk of money in a taxable account could be crucial.

It's good to have options

There's technically no such thing as having too much money saved for retirement. But there may be such a thing as having too much money saved in a restrictive account like an IRA or 401(k).

Think about your current retirement plan balance, projected growth, and personal plans. If continuing to fund an IRA or 401(k) doesn't align with those things, it's a sign that you should stop immediately and pivot to a different type of account.

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