Don’t stuff every dime into 401(k) plan

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Dear Dr. Don,
My husband and I are currently contributing the maximum amount toward our 401(k) and traditional IRAs. We are wondering, though, if we should reduce those contributions and allocate some funds to a CD or another investment type.

We are in our young 30s and are trying to maximize our savings since time is somewhat on our side. Also, we are hoping to start a family soon. So the idea of having some available funds is appealing, but we want to have our money working for us as much as possible.
— Regan Reconsiders

Dear Regan,
I’m a big proponent of financial flexibility. It’s great that you’ve been able to max out your contributions to your firms’ 401(k) plans and traditional IRAs. But as you point out, there are other life goals besides retirement — like starting a family.

While it’s true that many 401(k) plans allow you to take out a plan loan, and you gain some financial flexibility from having that option, it’s also true that the loan becomes immediately due and payable if you are no longer employed by that firm.

It’s also true that there are some ways to tap your IRA account before age 59½ without triggering the 10 percent penalty tax, like the first-time homeowner exception. However, you’ll still owe income taxes on the early distributions.

If you don’t already have one, I’d suggest building an emergency fund in a taxable account that can help you through a financial crisis. The Bankrate feature “Creating an Emergency Fund” provides some guidance, as does an earlier column of mine, “Emergency Fund Yields.”

Beyond the emergency fund savings, you can make an argument for holding some of your investment portfolio in a taxable account versus putting everything in a tax-advantaged retirement account.

The split between taxable and tax-advantaged accounts does in large part come down to life goals. If one of you is planning to step out of the workforce for a period of time while raising your children, building a reserve outside of your retirement accounts can keep you from raiding those accounts for current expenses.