Suze Orman Says This Is One Retirement Benefit You Don’t Want to Skip

Preparing for retirement is a challenge for many people because it can be hard to save and invest enough to build a secure future. One reason why this may be such a challenge is that Americans are passing up a great retirement benefit — at least according to finance expert Suze Orman.

Orman provided some insight on her website about a key retirement benefit that many people are not taking advantage of,  even though they should be. Here’s the benefit Orman says many people overlook, but that they can’t afford to skip.

Orman warns against skipping this key retirement benefit

According to Orman’s article about an important retirement benefit that many people pass up, far too many people who have access to a Roth 401(k) at work are not taking advantage of it. Orman cited data from Vanguard in support of this position, making clear that while 85% of 401(k) plans offer the option to choose a Roth account, fewer than one in five people who have the chance end up participating in a Roth 401(k). This is something that Orman says has her “pulling my hair out.”

Orman believes this is a retirement benefit you don’t want to skip for one big reason: This account provides some great tax breaks.

Roth 401(k) accounts work differently from traditional IRAs and 401(k) plans. Specifically, they offer the chance to defer your tax savings. Instead of contributing with pre-tax dollars, you make your investments with money that has been taxed. Your investment ends up costing you more when you contribute, because the tax savings is not offsetting the amount of money you are putting away. But the big advantage of the Roth account is that your tax break comes later.

Distributions from Roth 401(k) accounts (and from Roth IRAs) will not be subject to taxes when you withdraw the money in retirement. As Orman explained, having an account that you can withdraw from without paying taxes is a huge advantage when you are living on a fixed income in your later years.  Orman also said that choosing this account will do more than just lower your taxable income. It can also:

• Reduce premiums you pay for Medicare Part B because those premiums are higher for high earners
• Help you to avoid taxes on Social Security benefits because Social Security benefits only become taxable once provisional income (all taxable income, some non-taxable income, and half of your Social Security benefit) is above $25,000 as a single filer or $32,000 as a married joint filer. Distributions from a Roth don’t count as provisional income.

Orman said the tax benefits from this account are invaluable, and you should not skip it when you are making your plans for retirement.

Should you be contributing to a Roth 401(k)? 

Orman is right that a Roth IRA has some big benefits. And, if you expect that you will be in a higher tax bracket in retirement, then it is worth putting at least some, if not most, of your money into one. After all, it makes good sense to save on taxes at the time when your bill would be the highest.

Since tax rates have been very low in recent years, especially based on historical standards, this may mean that they will go up over time before you get to retirement — especially given the fact that the government is continuing to go deeper into debt and some day will need to climb out of the hole to avoid serious economic pain.  You could end up being very happy that you put off your tax break if tax rates skyrocket due to the country’s financial situation.

Of course, contributing to a Roth does make it a little harder to max out your contributions without government help. So, if you cannot afford to max out your Roth (or regular account), the key is to invest as much as you can — and if taking an up-front tax break helps you to do that so you can get compounding working for you and get into the habit of regular investing, that would be the best move. 

You can also work with a financial advisor to talk about what to do with your retirement funds, whether a Roth 401(k) is right for you, and what options you have available to make the most of your money both now, when you are working, and later as a retiree when you’re living off the funds you saved.