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Is it possible to save too much for retirement?

September 30, 2011: 5:05 AM ET

My husband and I are in our late twenties and are avid savers with no debt except our mortgage. We have no major goals around the corner, but we do plan to have children in the next year or two. How much of our savings should we allocate toward our retirement accounts, and how much should we keep in investments that do not penalize us for early withdrawals over the next 40 years? We each max out our Roth IRAs and take part in employer-sponsored 401(k)s, but is there a point at which we may be contributing too much to our retirement accounts? – Katie H., San Diego

You've asked the universal question: How much should you save for retirement, and where should you be saving it? The answer is: It depends. "It's tough to give a good answer without knowing everything," says Annapolis financial planner Ted Toal. But while you probably can't save too much for retirement, it does make sense to diversify your savings beyond just your 401(k) and individual retirement account. "I've seen situations where clients hit retirement and all of their money is in tax-deferred accounts," Toal says. "It's not necessarily a bad thing, but it does raise tax issues, because they're paying income tax on 100 percent of their withdrawals."

A good mix of retirement savings includes some in a 401(k) or other tax-deferred account, some in a Roth (since withdrawals are tax-free in retirement), and some in a taxable account. That way, if you need to tap some of your savings before retirement—for a major home upgrade, say, or for expenses that pop up when you start having kids—you have a few options. You're young, so there's plenty of time for the unexpected.

A good plan of action: Save enough in your 401(k)s to get a company match, if one exists. After that, max out your Roth accounts. Then stash additional savings in a taxable account, such as a brokerage account. "Normally I recommend index funds or exchange-traded funds in there, as they tend to be more tax efficient than actively managed funds," and are therefore more suitable for taxable accounts, Toal says.

--Kate Ashford

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