The Best Investing Move for Your Retirement

Regardless of what happens in the stock market over the short term, I have a surefire investment move to make right now that is going to be a big win for you in retirement.

I want you to make sure you are doing some of your retirement saving in a Roth account. And I was surprised to see a recent report that even though 90% of 401(k) plans now offer the ability to save in a Roth 401(k), only about 20% of plan participants make use of this valuable retirement strategy.

I want to be clear: with a Roth 401(k), there is no income limit to be able to contribute. The income rules only come into play with Roth IRAs.

So for those of you saving in a 401(k), I want you to check if your plan offers the Roth 401(k) option. If so, I think you should consider switching your new contributions over to the Roth 401(k). (Please note: I am not talking about converting any Traditional 401(k) money into a Roth. That is a different matter that has tax implications. What I am suggesting is that your ongoing (new) 401(k) contributions go into a Roth account.)

Why You Should Consider a Roth 401(k)

Roth 401(k)s are funded with money you have already paid tax on. The upside is that when you eventually make withdrawals from a Roth 401(k), the money will be tax-free if you follow a few simple rules.

Traditional 401(k)s work the other way around: the amount you contribute is pre-tax (meaning it doesn’t count as taxable income for that year). But in retirement, every dollar you pull out of a traditional 401(k) or IRA is taxed as income.

It's hard to focus on the future, but that’s my job. And I strongly believe that you will appreciate having some of your retirement money in Roth accounts once you are in retirement. That is tax-free money you can use in retirement.

For starters, if you already have built up a lot of savings in traditional accounts, it makes sense to now switch your new savings to a Roth 401(k). That way, your taxable RMDs in the traditional accounts will be lower as you shift your new contributions into Roths.

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)s 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.

And then there’s life’s what ifs. What if you decide to take that big bucket-list trip or gather your far-flung family together for a reunion? Or what if you find you need more help around your home as you age? Being able to make withdrawals from a Roth account will mean you can use that money without owing any tax.

I hope if you’ve done a great job saving for many years in a Traditional 401(k), you will consider focusing your new retirement investing in a Roth 401(k). It will give you important flexibility in retirement to manage your tax bill (and your Medicare Part B premium).