Suze Orman TwitterSuze Orman FacebookSuze Orman YouTubeSuze Orman LinkedIn
View Blog & News List

Why You Should Seriously Consider a Roth 401(k)

July 09, 2015 at 12:00 AM

You know I love, love, love Roth IRAs. One of the prime reasons being that in retirement you will not owe a penny of tax on your withdrawals. That’s quite different from a Traditional IRA where every penny will be taxed at your ordinary income tax rate.

It wasn’t until nearly 10 years ago that 401(k) plans were allowed to offer a Roth version. Today about half of plans currently give employees the option of saving in a Traditional 401(k) or a Roth 401(k). Yet very few employees are opting for the Roth 401(k).

I think that can be a shortsighted mistake.

Yes, it’s absolutely true that there is an upfront tax break when you save in a Traditional 401(k) that you don’t get with a Roth 401(k). Every dollar you contribute to a Traditional account reduces your taxable income for that year. But money you put into a Roth account is made with after-tax dollars, so there is no “upfront” tax break.

I get that the tax break right now can be appealing. But what you need to carefully consider is the long-term impact-or tradeoff-of that decision. As I mentioned, all money withdrawn from a Traditional 401(k) will be taxed at your ordinary income tax rate, while there will be no tax on withdrawals from a Roth 401(k).

I think the prospect of no taxes in retirement on your retirement withdrawals is well worth considering. One of the common rules of thumb is to go with the Roth only if you expect your tax rate in retirement to be lower than your tax rate today. I’ve got two issues with that.

First, who knows where tax rates will be 10, 20, 30 years from now? I have to tell you that today’s rates are a lot lower than when I started my financial planning career.

Second, even though your income will likely be less in retirement, that doesn’t mean you automatically will be in a much lower tax bracket, if your bracket falls at all. Consider that in 2015 a married couple filing a joint return with taxable income of $125,000 is in the 25% federal income tax bracket. If their income in retirement is $85,000, guess what? They are still in the 25% federal tax bracket, based on current tax rates.

One strategy to consider for those of you who have been saving in a Traditional 401(k) for years, is to consider switching your future contributions into a Roth 401(k), if your plan offers it. That way when you retire you will have tax flexibility, with some of your retirement income being tax-free and some taxable.


Tag Cloud

US Tax Codefinancial goal phraseFederal Stafford loanPhyllis Shelton expert long-term careAmy Lacyetcar buying mistakesbuy home you can affordNewtownCiti Simplicity Card teensfinancial aidIRA contribution gifted moneyHoliday Seasontitle insurance401Kfocus on needsburn outRevocable Living Trustlearn good financial choicesLong Term Care shoppingraise insurance deductibleMinor Children 8 month emergency fundterm life insuranceStaffords this year have a fixed 6.8% interest ratehigher monthly paymentincrease emergency savingsnot enough life insuranceSuze Orman spouse Kathy Travisget the most out of social security Financial Educatorfamily save at least $100 monthlycost of capitalization calculatorvalentines dayeliminate credit card debtstandard deduction 30 year mortgage open enrollment review women outlive menchildren's bookLTCeight month living expense loan is giftback door Roth IRAfinancing car traditional vs roth 401(k)confident of solutionBaby Boomersdon't cover cosmetic dentistryJose Rodriguez50 over 50don't charge a pennyadvice for college graduatesphysical health3 bucket approachHDHP/HSAbad retirement planningmortgage disclosureno fee transferEmergency Savingsbetter loan dealsHolidayETF'sGay Rightsno interestunexpected expenseraise your deductibleadd teenPBS SpecialForbes Top 10stay positiveSwap Older Annuities or Life Insurance Graceraising interest rateslower interest ratemobile appstore credit cardsOne Wallet At A Timeanticipated salaryHigh Credit Scorereferrals pay more than minimumfile asaplong term goalget over life insurance phobiais it necessarySuze Orman Scholarship15-year refinance dealARMpercentage men widowed 75-84Mass Mutualdepreciating asset High FICO Score = Better Rate10 year repayment plan lousy investmentdon't buy wantspermanent life insurancepaying for college15 year mortgage4 Must Have Documents borrowing plan FICO credit score credit card mortgagedon't defer interest paymentsCommunication Skills employer funding HSAdangerous retirement planwrite new goalwomen live longertake actionFinancial Power of Attorneymultiple lendersHeartaccelerate dental work20% down paymentteens and moneysame sex marriage band end Floridateach importance of helping othersmental healthrent vs buycollege studentworst financial mistakeMarlo Thomassavingspay high rate off firstgift not loanone credit cardAccuQuote.comkeep a schedulepublic service career student loan repayment car loanhigher insurance deductiblereal estate marketincrease retirement contribution ratebest interest of investorstretch out haircut appointmentsYoung Adult grandchild summer job IRA contributionloan no longer than 36monthsSave Us MoneySuze Ormanprovider of financial supportpositivehealthy retirement weightage appropriate chorelow mileage discount40% toward financial goalmax employer matched 401(k) contributiononly offered while employed closing costs 2% of loanInteresthealthy youoverspend on giftsno life insurance financially irresponsiblehousing marketLong Term Care Insurance adult children19 years cash flow problemfinancial fearslet them have 50% controlhealthy teethfraudulent returnfinancial concernPay Off Debt Before Retirementdon't do five year car loancompare provider pricing3 savings buckets AARP20 to 25 times annual incomeMortgage Credit Availability IndexThe Suze Orman ShowPrime Rate Increasepublic service loan forgiveness programco-sign Federal Reservebetter loan ratesfederal student loan deferment Prime Rate Rise 2015gift grandchild IRA contributionresponsibleAdequate Auto and Home Insurancepoint cost offset by savingsARM Cautionquick closingloan necessityPersonal Financeyours, mine & oursdon't use allowance as bribemarriage financial responsibilityrolloverSuze approvedCory Bookercreate new truthcouple financesAuto Savings high credit score discountHDHP's are good for yousocial work740 credit scorepercentage of women widowed 75-84secured cardUniversity of Illinoisresponsible with moneylowest cost fund optionMost Influential Celebrities ListLifestylegraduationmoney-aware childpay down student loan debtLegal GuardianUrbana-Champaignwives should be involved in retirementwomen longer life spanFinancial Gift Cliffpaid in fullstandard ratedear suzeget health insuranceultimate compounding giftSelfishretirment savingsgift up to 14,000high down paymentlower premiumcharges on credit cardEasy Life Insurance spring summer closing feesLoveproperty taxStudent Loan6 month waiting periodtax refund fraudGay Couplesdebtis it kind?home related tax break bonus costly legal Fundsiffy incomevalue moneyFinancial Systemdo you need life insurancePost-Divorcebetter termsBill and Pennyautomatic paymentHDHP's are not baddon't ignore open enrollmentalways use all paid time offlower rateinterest on student loans!00% tuition paidfiduciarymortgagelow down paymentprotect and provide for minor child FICO Scorenot gender specific home buying seasonretirement accountslower mortgage interestCivil Rightsignore 6 month grace period mortgage interest tax deductionteach your child good money habitslife insurancekid borrow firstUniversity of Floridasuitablenear historic lowsCredit Card Interest Ratecompare monthly expensesConventional loan PMIautomatic withdraw to savings juggle multiple financial goalsclosing disclosureForbesInvest for savings growthSchool of Social Workprotect dependent leave a legacyuniversal college accessschool SelectQuote.combe good exampleBeautysummer job match income pay down car loanadjust allocations community collegecollege graduatestudent loan repayment planMothershop online guaranteed level term policyfinancial argumentsNew american Dream low credit scorespeak new goalearn allowanceEmployer Matched ContributionRetirement Savingsdental insurance Final Goodbyesidelinedallowance taskpaid vacationHDHP Vital Documentsexercise reguarlyFederal PLUS loanmortgage brokerno waiting periodbuy homeAlarm Clock2015 financial roadmapbecome member Bankincentives for health care wellness screeningshort term goal TeachRich3 step financial road mapincrease retirement savingsMoney Marketnegotiate points with bank or sellerloved ones dependent on income10% donate to charitydream schoolage appropriate goalsdoctors in network20% down payment avoid feesdental savings planretirement planbest loan deal increased auto insurance premiumhome buying mistakesno late fee Financial CliffEric Dodge GiftsCollege of Veterinary MedicineMust Have Documentshigh FICO scoreworkaholicFHA loan feessavings pleasure8 Rulessuccessrepay student loansjanuary billsCredit scoreno tax on withdrawlsidentity fraudunder 18 financial giftpresident Obamais it necessary?money vowslong term careritual scheduleDeath Benefitbreakdown projected monthly housing costwaive home inspection bidLong Term Care premiumsno retirement funds for down paymentderailed planstudent loan repaymentdebt freepremiumoverspend on dining outpay credit debt ASAPhealthy retirement blood pressuremarriage inequalityInfluentialsinitial tax break special saving accountcommissionsno negativityFICO at least 720commitForeclosureStock InvestmentsStudent Debt Crisisdangerous money seasoncredit managementautomate student loan paymentsHSA tax savingsconsider roth 401(k)powerfulSuze is my biggest mentorCOLAGiftsame-sex marriageGoodbyelong-term care premiumspush yourself to save more for retirementroth iraswitch to roth 401(k)student loan debtmanage student loansone annual feeHoliday Shoppingmeet monthly ExhibitionNew York Lifeinterest capitalizationMoney-Savingcredit utilization rateFinancial Advicebuying car 2016credit uniondon't extend mortgage OverspendingRoth 401(k)no apologyschedule vacationcontribution monthly benefit Sandy Hook Elementary SchoolFinancial Awareness Video Festivalcalculate dependents annual income needsRevocable Trustunsubsidized Stafford loanbill paying prioritiesretain separate credit cardsborrow each year, capitalization is going to pile up origination feesonly refinance if it paysWashingtonbe true to yourselfholiday spendingheartacheFinancialLTCi ASAPcar leasingpurely financial standpointFixed Rate Mortgagemonthly dental insurance premiumenjoy saving pay interest while in schoolFRAInfluential Celebrityfinancial independencehome ownershipinsurance mistakerequire chore in exchange for allowanceinsurance yearly reviewthree year car loanoverspend on nights outhome loan credit score below 740 cut monthly cellular billfour steps to retirement savings verify retirement plan with HR or plan sponsorAshley Springerengaged in finances20% equitycommunity bankgay marriage ban end Florida death benefit 20 to 25 times annual incomecut monthly cable billannual cost of living adjustmentpreexisting condition not coveredSandy Hook Promisechildren under 18rising home pricesBankruptcyStudent DebtLTC shoppingCommencementdeath benefit needs for family2017 Taxesreduce interest ratestaycationcredit cardallowancebest interest ratesverify wellness screening and programspay off debtprescription tierreduce withholdingitemized deductionemergency fund savingsretirementaffordabilityCombo Insurance Productsstudentkids schedule paymentsis it true? can you afford itCD'sterm insuranceno private loansplanMoneyAARP Social security calculatorpay 100% cashalternative FICO scoreCNBCwould you decline a bonusdental discount planrefinanceSatisfyingFederal Funds Rateinsurancelife insurance name trust as beneficiarycostly insurance mistakehealthy gums2015 record year car salesno private loanCPI-Wemployer offered life insurancehome insurance401(k) Contributionsnon conventional routeraising mortgage rates big results shorter payback periodfile taxes quicklyknow before you owedoctor no longer in networksmall changes 2016 adjust estimated taxFiscal Responsibilityreplace permanent life insurance with termtax ID theftdon't blow tax refundprofessional advisormake saving a pleasurecontribute household expenses confidentcredit reporthealthy aging required disclosurehighest possible benefitreal estate mistakesemergency fund Retirement IncomeVeterinary Schoolhome budget after tax costloan big picture protect your familylive below your meanshigh deductible health care planno sneaking in feesletter to suzeearn more on savingslow-cost index mutual fundmax employee matchface your financial fearhome buying budgetSpendingdon't spend HDHP'sgrandparent IRA contribution comparison shoppingovercome financial fearsAmericans don't use all paid vacation timeTelepicturesWarner Bros Television Groupsetup automatic savings withdrawraise deductiblessocial security not going brokeChanging Livesprotect loved ones television hostavoid burn outsecure creditmax benefit covered8 month safety nettaxeslower overall drug costfocus on new truth buy down Inflation Benefitbuying a carfull retirement agesave money2016 adjust withholdingno splurge maintain standard of livingget credit cardsocial security never insolventidentity theftCredit Card Rate Increasewomen long term careDurable Power of Attorney for Health CareSuze Orman's Money WarsHow To Build Creditdon't derail retirement savingsdo not pay allowance for good behaviorbad decisionszero rate transfer dealsaffordable premiumlong-term care approved medical 100% tax-freeWall Streetswitch to spouse coverageescrowtoo expensive schoolbe kind to yourselfdebit cardpeace of mindbudget20 year level term new carsave high premiumsFree Debt Eliminatorat worst still pay 75% benefitstudent loan repayment estimatorreduce monthly payment3% debt transferred Suze changed my lifeWillFinancial Awarenessemotional stakesback-to-school budgetcnbc alarm clocksocial securityFinancial Solutions For Youbalance transfer refundstrained relationship

View Blog & News List
People First. Then Money. Then Things.
Connect with me on Facebook Connect with me on YouTube Connect with me on Twitter
© 2017 Suze Orman Media Inc. All rights reserved.
 |  Search  |  Sitemap  |  Privacy  |  Terms
Sign Up For E-mail Offers
Open Panel
Close Panel