Suze Orman Thinks This Is 'The Stupidest Thing' Retirement Savers Can Do

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  • It's important to build a nest egg so you have money available in retirement.
  • It's also important to choose your savings plan wisely.
  • Suze Orman recommends Roth savings plans for a few key reasons.

It's a mistake you don't want to make.

There's a reason some people end up struggling once they reach retirement. They think they'll manage to get by on Social Security alone, so they fail to set money aside for the future during their working years.

The reality is that Social Security will only replace about 40% of your pre-retirement paycheck, and that assumes you're an average earner. Most retirees need roughly twice that much income to live in a reasonably comfortable fashion. And that's why it's important to bring personal savings into retirement.

But if you're going to build yourself a nest egg, it's important to save your money in the right account. And if you're not taking advantage of a specific account type, you're making a huge mistake, insists financial guru Suze Orman.

Wouldn't you like tax-free retirement income?

If you're saving for retirement on your own (meaning, not through an employer-sponsored plan), you have a choice. You can fund a traditional IRA, or you could put your money into a Roth IRA.

The upside of a traditional IRA is getting an immediate tax break on the money you put in. The downside, though, is having your withdrawals taxed in retirement.

Meanwhile, Roth IRAs work the opposite way. With a Roth IRA, there's no tax break for funding your account. But once you invest your money in that account, it grows tax-free. And withdrawals are tax-free as well.

That's an important consideration. While you might think money is tight right now, imagine how much tighter it might be in retirement, once you no longer have a regular paycheck coming in.

Plus, while we know what tax rates look like today, we don't know what they'll look like in the future. And so if you keep your retirement savings in a traditional IRA, you'll run the risk of paying more taxes on your money than expected down the line. A Roth IRA takes away that risk.

That's why Suze Orman is a big fan of Roth savings plans. And in a recent Motley Fool podcast, she said that funding a traditional retirement plan is the stupidest thing long-term savers can do.

Should you open a Roth IRA?

Saving in a Roth IRA has many benefits. You get more flexibility when it comes to withdrawing your money penalty-free ahead of retirement (though to be clear, you really should leave those funds alone until your career has wrapped up) and you won't have to worry about taxes on distributions once you're older.

The only catch with Roth IRAs is that higher earners can't fund one directly. If you're single, you're barred from making Roth IRA contributions if your income is over $144,000. If you're married, that limit rises to $214,000.

But even in those situations, you can always put money into a traditional IRA and then convert it to a Roth after the fact. And that way, you'll get the benefit of not having to worry about taxes at a time in your life when money may get tight.

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