Suze Orman: Why You Shouldn’t Overlook This Retirement Planning Benefit
Written by
John Schmoll
Edited by
Zuri Anderson
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Many Americans have access to retirement planning through their employers via a 401(k) plan. These employer-sponsored retirement plans simplify saving for retirement in various ways. For years, most plans were traditional, meaning the funds went into your 401(k) account pre-tax, giving you the tax benefit now.
Roth 401(k) plans have grown in popularity in recent years, which gives the tax benefit upon withdrawal of funds. While 85% of employer-sponsored plans offer a Roth 401(k) option, only 18% take advantage of it, according to Vanguard. Such a choice could cause problems for many Americans.
In a recent article on her website, personal finance guru Suze Orman expressed concern about the choices many Americans are making in their retirement planning. Here are three reasons why Orman said you shouldn’t overlook saving in a Roth 401(k) account when given the choice.
There Is No Income Limit
Roth 401(k) plans act similar to their IRA counterpart, except for one major difference: Roth IRAs have income limits. If you earn over a certain amount, you may not be able to contribute to a Roth IRA.
The Roth IRA phaseouts in 2025 are $150,000 to $165,000 for single filers and $236,000 to $246,000 for joint filers, according to the IRS. The lower tier is when the phaseout begins, and once you pass the higher tier, you’re unable to contribute to a Roth IRA.
That’s not the case for Roth 401(k) plans. Financial advisors commonly argue that high earners should focus on traditional IRAs or 401(k) plans to take advantage of the tax benefits now. Orman argues differently.
“I don’t care what tax bracket you’re in. You have to be crazy to do anything other than a Roth retirement account,” Orman recently told CNBC. The lack of an income limit is just one more reason, in Orman’s eyes, that the Roth 401(k) plan is a compelling option.
It Provides Tax Benefits Later
Traditional 401(k) contributions are pre-tax. Americans get the tax benefit upfront. Unfortunately, distributions in retirement are taxed as income, which can be problematic.
Alternatively, Roth IRAs provide tax benefits in retirement.
“Roth 401(k) [plans] are funded with money you have already paid tax on. The upside is that when you eventually make withdrawals from a Roth 401(k) [account], the money will be tax-free if you follow a few simple rules,” Orman said in a recent article on her website.
Orman isn’t opposed to traditional 401(k) plans, but she recommends shifting new contributions to a Roth 401(k) account if your employer offers it.
“I have nothing against Traditional 401(k) [accounts], but for those of you who have spent years saving in a Traditional 401(k) [plan], it would be so smart to now focus on building up savings in a Roth 401(k) [plan],” Orman said.
Not only will distributions from the Roth 401(k) account be tax-free, but having a mix of both traditional and Roth 401(k) plans can provide tax diversification, which can be helpful in retirement.
It Eliminates Required Minimum Distributions
Required minimum distributions (RMDs) out of a traditional 401(k) account are a requirement for Americans once they reach age 73, according to the IRS. While funds can be a helpful way to manage retirement needs, RMDs count as taxable income.
That’s not so with Roth 401(k) plans. Like Roth IRAs, RMDs are not a requirement, and you can take contributions and earnings from a Roth 401(k) plan if you’re at least 59 ½ years old and the account has been open for five years.
RMDs can create overlooked problems in retirement.
“It can also help keep your Medicare premiums in check once you are enrolled. Medicare Part B premiums are based on your taxable income. The more you withdraw from traditional 401(k) [accounts] in retirement, the higher your taxable income will be. Being able to keep those withdrawals lower (by having tax-free money available in Roths) can mean you will have a lower Medicare Part B premium,” noted Orman in a separate article on her website.
The withdrawal freedom of Roth 401(k) accounts makes them an attractive choice for many investors. An employer-sponsored 401(k) plan is a valuable resource to help Americans save for retirement. Don’t overlook using a Roth 401(k) account, if offered, to strengthen your efforts.
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