Suze Orman: Why a Roth 401(k) Is the Best Investing Move for Your Retirement
Written by
Brooke Barley
Edited by
Rebekah Evans
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The stock market has taken some major dips recently, which has made some investors worried when it comes to their retirement accounts. Some people might be looking into alternative strategies to keep their future money as safe as possible from stock market turmoil.
Below is what financial advisor Suze Orman recommended investing in now that will pay off big come retirement, based on one of her blog post.
The Difference Between a Traditional 401(k) and a Roth 401(k)
Employees might be contributing to their work-sponsored 401(k) plan. This is a good start for retirement savings, but Orman outlined that solely contributing to a traditional 401(k) has some pitfalls that a Roth 401(k) does not. She said Roth 401(k) funds have already been taxed, while traditional 401(k) contributions do not count as taxable income for that year. But when you pull out the funds in retirement — out of a traditional 401(k) or IRA — they are taxed as income.
The maximum amount individuals can contribute each year to a traditional 401(k) and Roth 401(k) is the same and it is a combined amount. This means account holders can’t contribute the max to their traditional 401(k), then turn around and contribute the same amount to their Roth 401(k). That maximum amount applies as a total maximum to all of their 401(k) accounts.
Why This Matters
For those living off traditional 401(k) money in retirement, the money they withdraw will be considered taxable income. This can have a huge impact on healthcare expenses for seniors. Orman said that Medicare Part B costs are based on taxable income, so depending how much is withdraw from traditional 401(k)s in retirement, that determines how high your taxable income is.
How To Make the Switch
Transferring money from a traditional 401(k) to a Roth 401(k) before retirement isn’t a good idea because of the hefty tax that will need to be paid. Instead, Orman recommended keeping 401(k) accounts as they are, then simply opting for contributions to a Roth 401(k) going forward. This option should be available through most employer-sponsored retirement plan options. Orman was surprised by a report that said despite 90% of 401(k) plans now offering the possibility to save to a Roth 401(k), thus retirement strategy is only used by less than 20% of the plan participants.
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Sources
- Suze Orman, “The Best Investing Move for Your Retirement.”
