Why You Shouldn’t Overlook This Retirement Planning Benefit

Many Americans can plan for retirement through their employer through a 401(k) plan. These employer-sponsored retirement plans simplify retirement savings in a variety of ways. For years, most plans were traditional, meaning the funds came into your 401(k) account pre-tax, allowing you to take advantage of the tax benefits now.

Roth 401(k) plans, which offer tax benefits when funds are withdrawn, have grown in popularity in recent years. Vanguard says that while 85% of employer-sponsored plans offer a Roth 401(k) option, only 18% take advantage of it. Such a choice could cause problems for many Americans.

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In a recent article on her website, personal finance guru Suze Orman expressed concern about the choices many Americans are making in their retirement plans. Orman says here are three reasons you shouldn’t overlook saving in a Roth 401(k) account when you have the choice.

Roth 401(k) plans are similar to IRA plans, with one major difference: Roth IRAs have income limits. If your income exceeds a certain amount, you may not be able to contribute funds to a Roth IRA.

According to the IRS, the phase-out amounts for Roth IRAs in 2025 are $150,000 to $165,000 for single filers and $236,000 to $246,000 for joint filers. The lower tiers are when the phaseout begins, and once you pass the higher tiers, you can’t contribute to a Roth IRA.

This is not the case with a Roth 401(k) plan. Financial advisors generally agree that high-income earners should look to traditional IRA or 401(k) plans to take advantage of current tax benefits. Orman takes a different view.

“I don’t care what tax bracket you’re in. You’d have to be crazy to do anything other than a Roth retirement account,” Orman recently told CNBC. According to Orman, the lack of income limits is just one more reason why a Roth 401(k) plan is a compelling choice.

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Traditional 401(k) contributions are pre-tax. Americans get tax benefits upfront. Unfortunately, pension distributions are taxed as income, which can cause problems.

Additionally, a Roth IRA provides tax benefits in retirement.

“Roth 401(k) [plans] Funded by money you’ve already paid taxes on. The benefit is that when you finally withdraw money from your Roth 401(k) [account]the money can be tax-deductible if you follow a few simple rules,” Orman said in a recent post on her website.

Orman isn’t opposed to traditional 401(k) plans, but she recommends moving new contributions into a Roth 401(k) account if your employer offers one.

“I’m not opposed to traditional 401(k)s [accounts]but for those who have spent years saving in a traditional 401(k) [plan]it’s smart to focus on building savings in a Roth 401(k) now [plan],” Orman said.

Not only are distributions from a Roth 401(k) account tax-free, but a mix of traditional and Roth 401(k) plans can provide tax diversification, which can be helpful in retirement.

According to the Internal Revenue Service (IRS), Americans must take minimum distributions (RMDs) from traditional 401(k) accounts once they reach age 73. While funds are an effective way to manage your retirement needs, RMDs also count as taxable income.

This is not the case with a Roth 401(k) plan. As with a Roth IRA, RMDs are not required, and you can take contributions and income from a Roth 401(k) plan if you are age 59 1/2 or older and the account has been open for five years.

RMDs can create problems that are overlooked in retirement.

“It can also help control your Medicare premiums once you enroll. Medicare Part B premiums are based on your taxable income. The more you withdraw from your traditional 401(k) [accounts] The higher your taxable income is in retirement. Being able to keep withdrawal amounts lower (by using tax-free funds in Roths) may mean you’ll get lower Medicare Part B premiums,” Orman noted in another article on her website.

The freedom of withdrawals from a Roth 401(k) account makes it an attractive option for many investors. Employer-sponsored 401(k) plans are a valuable resource for helping Americans save for retirement. Don’t neglect using a Roth 401(k) account (if you have one) to enhance your efforts.

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This article originally appeared on GOBankingRates.com: Suze Orman: Why You Shouldn’t Ignore This Retirement Plan Benefit