Suze Orman Is a Big Fan of This Retirement Plan. Here's Why

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  • Many people save for retirement in a traditional IRA or 401(k).
  • Suze Orman thinks it pays to consider a Roth IRA or a Roth 401(k).

It's a savings option worth considering.

You'll often hear that it's important to save for retirement so you have enough money to live on once you stop working. And that's definitely solid advice.

While you can probably expect some amount of money from Social Security if you worked for many years, the monthly benefit you get might fall short of your expectations. Remember, Social Security will only replace about 40% of your pre-retirement wages, assuming you're an average earner. And if you're an above-average earner, guess what? Social Security will replace an even smaller percentage of your income.

That's precisely why you need savings of your own to make ends meet later in life -- especially since most seniors end up needing 70% to 80% of their former income to live comfortably. And when it comes to building savings, you have choices.

Many people opt to house their retirement savings in a traditional IRA or 401(k). But financial expert Suze Orman thinks it pays to consider going a different route.

Why a Roth savings plan may be a better choice

The upside of funding a traditional IRA or 401(k) is getting an immediate tax break on the money you put in. If you contribute $5,000 to a traditional IRA or 401(k) this year, that's $5,000 of earnings the IRS won't get to tax you on.

But while you'll enjoy an immediate tax break with a traditional retirement plan, you'll pay taxes when you take a withdrawal from your savings. And that's not ideal.

First of all, you never know when you might end up having to take an early retirement plan withdrawal. Tapping your IRA or 401(k) before age 59 ½ will generally result in a 10% penalty on the sum you remove (though 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 come into play, too.

That's why Orman says it pays to consider a Roth IRA, or a Roth 401(k) if your employer savings plan offers that option (not all employer plans do). With a Roth account, there's no tax break on your contributions. But any investment gains in your account will be yours to enjoy tax-free, and withdrawals will be tax-free, too. That gives you a lot more financial flexibility at different stages of life, including retirement, when you may find that money gets tighter and that sharing your income with the IRS is more of a burden.

It pays to take Orman's advice

Suze Orman knows a lot about investing and retirement planning, so it pays to consider opening a Roth savings account and enjoying the benefits of tax-free withdrawals. That said, you don't need to keep all of your money in a Roth IRA or 401(k). If you need a near-term tax break, consider dividing your contributions between a traditional and Roth savings plan so you shield some income from the IRS but also set yourself up for tax-free income later in life.

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