90% of Plans Offer It, But Only 20% Use It — Suze Orman Says This 401(k) Feature Is Being Ignored at Your Own Risk

When it comes to retirement planning, many Americans contribute to a traditional 401(k). But there’s another option available in most employer-sponsored retirement plans — and according to personal finance expert Suze Orman, far too few people are taking advantage of it.

The Roth 401(k) is a feature offered by roughly 90% of workplace retirement plans, yet only about 20% of participants are using it, according to Orman. She believes this overlooked strategy could offer major benefits, especially when it comes to taxes in retirement.

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Roth 401(k) vs. Traditional 401(k): Know the Difference

With a traditional 401(k), your contributions are made with pre-tax dollars. That means you reduce your taxable income today, but you'll owe income tax on every dollar you withdraw in retirement.

A Roth 401(k), by contrast, is funded with after-tax dollars. You won't get a tax break up front, but qualified withdrawals in retirement are completely tax-free. That includes both your contributions and any investment earnings.

"So for those of you saving in a 401(k), I want you to check if your plan offers the Roth 401(k) option. If so, I think you should consider switching your new contributions over to the Roth 401(k)," Orman wrote in a recent blog post. 

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Why Suze Orman Recommends Switching Future Contributions

Orman isn't advising anyone to convert their existing traditional 401(k) balances to a Roth — that move comes with a tax bill. Instead, she's suggesting that savers consider directing new contributions into a Roth 401(k), if their plan offers it.

This strategy, she says, could help reduce your taxable income in retirement. If you've already built up savings in a traditional 401(k), adding Roth savings to the mix gives you more flexibility. You'll be able to tap into tax-free funds in retirement, which could help you stay in a lower tax bracket and minimize required minimum distributions from your traditional accounts.

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Avoiding Higher Medicare Premiums

Another important reason Orman says to consider a Roth 401(k)? Your future Medicare premiums.

Medicare Part B premiums are based on your taxable income. Withdrawals from a traditional 401(k) count as taxable income, but withdrawals from a Roth 401(k) do not — assuming the account has been open for at least five years and you're 59½ or older.

By using tax-free funds from a Roth 401(k), you may be able to avoid crossing into higher income tiers that trigger increased Medicare costs.

More Flexibility for Life's "What Ifs"

A Roth 401(k) can also provide valuable peace of mind. Whether it's a big vacation, home care, or an unexpected expense, knowing you have access to tax-free funds can ease the financial pressure.

"I strongly believe that you will appreciate having some of your retirement money in Roth accounts once you are in retirement," Orman says.

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Bottom Line

If your employer offers a Roth 401(k), it might be worth giving this underused tool a closer look. Contributing even a portion of your future retirement savings to a Roth 401(k) could offer greater tax flexibility, protect your Medicare premiums, and give you more control over your retirement income.

Before making any changes, consider speaking with a financial advisor or tax professional to make sure the strategy fits your situation.

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