SUZE Orman reckons savers should put “every single cent” in a Roth 401k account.
These retirement accounts help you save for your older years – and the contributions are sometimes matched by your employer.
The money guru’s advice was first reported by CNBC last year, but has since resurfaced as Americans continue to seek advice for retirement.
Contributions to a Roth account are made with after-tax dollars, but you can withdraw the cash tax-free in retirement.
Mrs Orman said: “If your employer offers you a traditional retirement account and a Roth retirement account, you should be putting every single cent into the Roth version of your retirement account.
“When you do that, later on in life, if you go to take that money out, it will be tax-free.”
She said savers will be “far better off” taking the cash as one lump sum to put off the mortgage, for example, to reduce monthly expenses.
However, it’s only possible if the money is in a Roth account and not in a traditional 401k, because you’d owe income tax on the latter, she added.
About 70% of employers offer Roth 401k plans, so make sure to double-check with yours if they do the same.
Mrs Orman is a fan of Roth 401k accounts and IRAs as they’re more flexible than the traditional 401k.
So if your employer doesn’t offer a 401k plan, you can consider opening a Roth IRA instead.
These don’t require you to take the required minimum distributions, while a traditional retirement account mandates withdrawals after age 72.
If you miss this deadline, or don’t take enough money out, the amount not withdrawn is typically taxed at a hefty 50% rate.
With a Roth IRA, you can also withdraw your cash before the age of 59 1/2 without being subject to a tax penalty, as long as you’ve held the account for at least five years.
However, if your employer offers to match contributions in a traditional 401k, make sure to make the most of it as it’s free money.
Mrs Orman recently also warned about key retirement account mistakes that “you can’t afford to make”.
Plus, she’s revealed why you should delay collecting social security benefits when you retire.
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