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 As I mentioned, all money withdrawn from a Traditional 401(k) will be taxed at your ordinary income tax rate, while there will be no tax on withdrawals from a Roth 401(k).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

raise your deductiblecar loanpaid vacationinsurance yearly reviewrent vs buysame sex marriage band end Floridapowerfulspeak new goalprotect loved ones don't derail retirement savingsprofessional advisorhealthy retirement blood pressureForeclosureinterest on student loansUrbana-ChampaignMoneysavings pleasuremobile appUS Tax Codeonly refinance if it payssecured cardSelfishdon't blow tax refunddeath benefit 20 to 25 times annual incomepercentage of women widowed 75-84Financial Clifffiduciarymax employee matchretirement planaccelerate dental work740 credit scoreGiftlive below your meansrollovermax benefit coveredbetter loan ratesaffordabilitycar buying mistakeshome loan credit score below 740 long term goalburn outadult childrenwomen outlive mencan you afford itFICO ScoreCNBCwrite new goalultimate compounding gift10 year repayment plan healthy youno fee transfercar leasingFinancial Educatordangerous retirement plangift grandchild IRA contributionFinancial Power of Attorneyno retirement funds for down paymentpublic service loan forgiveness programwives should be involved in retirementdental savings plansavingsstore credit cardslousy investmentFixed Rate Mortgagelow credit scoreSuze approvedoverspend on nights outcut monthly cable billSchool of Social Workcompare provider pricingstay positivenot gender specific Adequate Auto and Home Insuranceno apologywomen live longerNew York LifeFundsFinal Goodbyeautomatic withdraw to savings Eric Dodge know before you owecreate new truthFiscal Responsibility30 year mortgage 15-year refinance dealMost Influential Celebrities List8 month safety nethome ownershipco-sign AARP Social security calculatorFICO at least 720teach your child good money habitsreferrals small changes Invest for savings growthSelectQuote.comNewtownFree Debt Eliminatorbest interest of investorreal estate marketSuze Orman's Money WarsSandy Hook Elementary School15 year mortgageSuze Orman spouse Kathy Travisresponsible with moneyPay Off Debt Before Retirementloan big picture buy down summer job match income pay credit debt ASAPsave spring summer costly legal shorter payback periodlet them have 50% controlreduce interest ratecostly insurance mistakehome buying mistakesholiday spendingstandard deduction approved medical 100% tax-freeverify wellness screening and programshighest possible benefitincentives for health care wellness screeningConventional loan PMImaintain standard of livingrefinanceadvice for college graduatesget over life insurance phobiaget the most out of social security home buying budgethealthy aging public service career student loan repayment Revocable Trustfull retirement ageRichFederal Stafford loanVital DocumentsPrime Rate Increasevalue moneySandy Hook PromiseFinancialincrease retirement savingsmoney-aware childStudent Debtlower mortgage intereststandard rateFinancial Awarenesshousing marketstudentinsuranceAlarm ClockHDHP'slearn good financial choicespeace of mindhigh FICO scoresocial security not going brokeraise insurance deductibleeight month living expense long-term care no splurge raising interest ratesitemized deductionterm life insurancerequired disclosureCommunication Skills mortgage disclosureno negativityCD'sFICO credit score credit card mortgagehome insurancecommissionsmoney vowsDurable Power of Attorney for Health Care10% donate to charityUniversity of IllinoisCivil Rightsovercome financial fearsFinancial Gift Clifffile taxes quicklytitle insuranceLong Term Care premiumsidentity fraudfinancial independencegraduationAuto Savings doctor no longer in networkprotect dependent Beautyteach importance of helping othersSuze changed my lifedear suzePersonal Financefile asapbetter termsFederal Reservefinancial concernstrained relationshipis it necessary?high premiumsreduce withholdingage appropriate goalsInflation Benefitdream schoolrequire chore in exchange for allowanceHDHP Retirement SavingsETF'sprotect and provide for minor child 2015 financial roadmapconsider roth 401(k)2015 record year car salesHSA tax savings3 bucket approachFederal Funds Rateuniversal college accessmortgage interest tax deductionForbesrepay student loansnon conventional routeraising mortgage rates origination feesOne Wallet At A TimeFRAlong-term care premiumsbuy homeGay CouplesBill and PennyGracechildren's bookshop online guaranteed level term policy40% toward financial goalbe good exampleHDHP's are not badOverspendingcredit cardSuze Orman Scholarshipfederal student loan deferment heartacheVeterinary Schoolcalculate dependents annual income needsunexpected expensekid borrow firstteensalways use all paid time offchildren under 18refundadd teeniffy incomeNew american Dream take actionno life insurance financially irresponsibledepreciating asset Employer Matched Contributionbad decisions20% down payment avoid feeskeep a scheduleemployer funding HSAinitial tax break not enough life insurancethree year car loancomparison shoppingallowance taskcnbc alarm clockretain separate credit cards3% debt transferred sidelinedjuggle multiple financial goalsSave Us Moneyoverspend on giftsPost-DivorceUniversity of Floridaback door Roth IRAdon't ignore open enrollmentstudent loan repayment planIRA contribution gifted moneyunsubsidized Stafford loancouple financesgrandchild summer job IRA contributioncredit managementsocial workwomen long term carepoint cost offset by savingssecure creditzero rate transfer dealsRoth 401(k)raise deductiblesmeet monthly multiple lendershigher insurance deductiblefocus on needs4 Must Have Documents student loan debtLTCAmy Lacyetno waiting periodcollege student8 RulesHigh FICO Score = Better RateInterestopen enrollment review Baby Boomersno late fee Long Term Care shoppingHoliday Seasonschool negotiate points with bank or sellerMass Mutualcommunity bankyours, mine & oursreal estate mistakesannual cost of living adjustmenteliminate credit card debthigher monthly paymentPBS Specialpreexisting condition not coveredAccuQuote.comretirment savingssuitablecompare monthly expensesGoodbyecommitCredit Card Interest Ratemortgageidentity theftHigh Credit ScoreCOLAshort term goal letter to suzeHoliday ShoppingPrime Rate Rise 2015ritual scheduleclosing disclosurepermanent life insuranceMinor Children dental discount plancharges on credit carddon't defer interest paymentslow mileage discountsame-sex marriageFederal PLUS loantoo expensive schoolcredit unionlife insurance name trust as beneficiarygrandparent IRA contribution buying a carbalance transfer at worst still pay 75% benefitnear historic lowsdon't charge a pennyMust Have DocumentsThe Suze Orman ShowPhyllis Shelton expert long-term careautomate student loan paymentsEasy Life Insurance HDHP/HSAteens and moneyCiti Simplicity Card CPI-Wstudent loan repayment estimatorincrease emergency savingsbecome member 20% equityworkaholicAshley Springerfinancing car increased auto insurance premiumCredit Card Rate Increaseschedule vacationkids schedule paymentshigh down paymenttaxespay interest while in schoolno private loanemployer offered life insuranceescrow!00% tuition paidfinancial goal phraseInfluentialsalternative FICO scoreLegal Guardianfour steps to retirement savings no sneaking in feesbe true to yourselfis it true? breakdown projected monthly housing costMoney-SavingBankruptcypresident Obamaearn more on savingsdental insurance prescription tier8 month emergency fundhome budget after tax costconfident of solutionget health insurancepay more than minimumSuze Ormandeath benefit needs for familydon't use allowance as bribeLoveHeartFHA loan feessocial security never insolventChanging Lives20 year level term don't extend mortgage term insurancedon't cover cosmetic dentistryprovider of financial supportpay down car loantax refund fraudpay off debtface your financial feardon't spend property taxBankvalentines dayallowancesuccesscontribute household expenses rising home priceshome buying season401(k) Contributionsphysical healthemergency fund savingsmarriage financial responsibilitypaying for collegeroth iradangerous money seasonstretch out haircut appointmentstax ID theftpremiumleave a legacy19 years cash flow problemunder 18 financial giftcollege graduateoverspend on dining outenjoy saving financial aidMarlo Thomasautomatic paymentaffordable premiumYoung Adult How To Build Creditconfidentloved ones dependent on incomedo you need life insurancespecial saving accountlowest cost fund optionearn allowancewomen longer life spanderailed planavoid burn outMortgage Credit Availability IndexSpendingfocus on new truth push yourself to save more for retirement20 to 25 times annual incomewould you decline a bonusdebt freeARMgift up to 14,000low-cost index mutual fundignore 6 month grace period marriage inequalityadjust allocations protect your familylower overall drug costdoctors in networkForbes Top 10buying car 2016switch to roth 401(k)verify retirement plan with HR or plan sponsorswitch to spouse coverageCory BookerTeachmonthly dental insurance premiumCombo Insurance Productspurely financial standpointonly offered while employed big results high deductible health care planCollege of Veterinary Medicinecommunity collegehealthy teethbest interest rates2017 Taxesdebit cardcredit reportgay marriage ban end Florida Influential Celebrityage appropriate choreStaffords this year have a fixed 6.8% interest rateborrow each year, capitalization is going to pile up exercise reguarlyHoliday3 savings buckets no interestemotional stakesSwap Older Annuities or Life Insurance loan is giftExhibitionFinancial Adviceone credit cardsave moneybuy home you can affordpay 100% cashbad retirement planningbe kind to yourselfis it kind?loan no longer than 36monthstelevision hostget credit cardMotherfraudulent returnAARPquick closingis it necessary50 over 50credit utilization rateincrease retirement contribution ratelong term careinterest capitalizationTelepictureshigh credit score discountfinancial fearssetup automatic savings withdrawfamily save at least $100 monthlylower premiumengaged in financesstaycationMoney Marketanticipated salaryborrowing plan pay down student loan debtRetirement Incomestudent loan repaymentplanhealthy gumsCredit scoregift not loanLTCi ASAPHDHP's are good for youpositivenew carLifestylepay high rate off firstGiftsresponsiblebest loan deal traditional vs roth 401(k)manage student loansStock Investments6 month waiting periodlower ratehome related tax break bonus Wall Streetmax employer matched 401(k) contributionretirement accountsretirementdebtno tax on withdrawlsJose RodriguezCommencementbetter loan dealsStudent Loanclosing fees20% down paymentcut monthly cellular billLong Term Care Insurance Financial Systempercentage men widowed 75-84Financial Solutions For Youcontribution LTC shopping2016 adjust withholdingDeath BenefitWillsocial securitylow down paymentwaive home inspection bidpaid in fullhealthy retirement weightdon't buy wantsmortgage brokerworst financial mistakeFinancial Awareness Video Festivalfinancial argumentsclosing costs 2% of loanone annual feejanuary billscost of capitalization calculatorAmericans don't use all paid vacation timedo not pay allowance for good behaviorSatisfying401Kreduce monthly paymentStudent Debt Crisislife insurancemonthly benefit no private loansmake saving a pleasurebudgetlower interest rateEmergency Savingsreplace permanent life insurance with termmental healthinsurance mistake3 step financial road mapARM Cautionloan necessityWashingtonWarner Bros Television GroupRevocable Living TrustSuze is my biggest mentorback-to-school budgetdon't do five year car loan2016 adjust estimated taxemergency fund Gay Rightsbill paying priorities


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