This is a savings option worth considering.
- Many people save for retirement in a traditional IRA or 401(k).
- Suze Orman thinks it’s worth considering a Roth IRA or a Roth 401(k).
You will often hear that it is important to save for retirement so that you have enough money to live on after you stop working. And that’s certainly solid advice.
Although you can probably expect some Social Security money if you’ve worked for many years, the monthly benefit you receive may not meet your expectations. Remember that Social Security will only replace about 40% of your pre-retirement salary, assuming you are an average earner. And if you have an above average income, guess what? Social Security will replace an even smaller percentage of your income.
This is precisely why you need your own savings to make ends meet later in life, especially since most seniors end up needing 70% to 80% of their old income to live comfortably. . And when it comes to saving, the choice is yours.
Many people choose to house their retirement savings in a traditional IRA or 401(k). But financial expert Suze Orman think it’s worth considering going a different route.
Why a Roth savings plan may be a better choice
The advantage of funding a traditional IRA or 401(k) is to get immediate tax relief on the money you invest in it. If you contribute $5,000 to a traditional IRA or 401(k) this year, that’s $5,000 of income that the IRS won’t get to tax you.
But while you’ll get immediate tax relief with a traditional pension plan, you’ll pay taxes when you withdraw from your savings. And that’s not ideal.
First of all, you never know when you might need to retire from an early retirement plan. Tapping your IRA or 401(k) before age 59½ will generally result in a 10% penalty on the amount you withdraw (although there are exceptions). But on top of that, with a traditional IRA or 401(k), you’ll also be taxed on your withdrawal. And during retirement, taxes on withdrawals will also come into play.
That’s why Orman says it pays to consider a Roth IRA or Roth 401(k) if your employer savings plan offers this option (not all employer plans do). With a Roth account, there is no tax relief on your contributions. But any investment gains in your account will belong to you tax-free, and so will withdrawals. This gives you much more financial flexibility at different stages of life, including retirement, when you may find that money is getting tighter and splitting your income with the IRS is more of a burden.
It pays to follow Orman’s advice
Suze Orman knows a lot about investing and planning for retirement, so it pays to consider opening a Roth savings account and reaping the benefits of tax-free withdrawals. That said, you don’t need to keep everything of your money in a Roth IRA or 401(k). If you need short-term tax relief, consider splitting your contributions between a traditional savings plan and a Roth savings plan to protect some income from the IRS, but also to prepare for income. not taxable later in life.