Suze Orman thinks it’s ‘the dumbest thing’ savers can do

This is a mistake you don’t want to make.

Key points

• It is important to build up a nest egg to have money available for retirement.
• It is also important to choose the right savings plan.
• Suze Orman recommends Roth Savings Plans for a few key reasons.

There’s a reason some people end up struggling when they retire. They think they will be able to get by on social security alone, so they fail to put money aside for the future during their working years.

The reality is that Social Security will only replace about 40% of your pre-retirement salary, and that’s assuming you’re an average earner. Most retirees need about twice as much income to live reasonably comfortably. And that’s why it’s important to bring personal savings into retirement.

But if you want to build a nest egg, it’s important to save your money in the right account. And if you’re not taking advantage of a specific type of account, 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 (ie, not through an employer-sponsored plan), you have a choice. You can fund a traditional IRA or put your money in a Roth IRA.

The advantage of a traditional IRA is to get immediate tax relief on the money you invest in it. The downside, however, is that your withdrawals are taxed upon retirement.

Meanwhile, Roth IRAs work in the opposite direction. With a Roth IRA, there is no tax relief for funding your account. But once you invest your money in this account, it grows tax-free. And withdrawals are also tax-free.

This is an important consideration. While you may think money is tight right now, imagine how tight it could be in retirement, once you no longer have a regular paycheck.

Also, while we know what tax rates look like today, we don’t know what they will look like in the future. And so if you keep your retirement savings in a traditional IRA, you run the risk of paying more taxes on your money than expected down the line. A Roth IRA removes this risk.

That’s why Suze Orman is a big fan of Roth savings plans. And in a recent Motley Fool podcast, she said funding a traditional retirement plan is the dumbest 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 without penalty before retirement (although to be clear, you really should leave those funds alone until the end of your career) and you won’t have to worry about taxes on distributions once you’re older.

The only catch with Roth IRAs is that high earners can’t fund one directly. If you are single, you are prohibited from making Roth IRA contributions if your income is over $144,000. If you are married, this limit increases to $214,000.

But even in these situations, you can still put money into a traditional IRA and then convert it to Roth after the fact. And that way, you’ll have the advantage of not having to worry about taxes at a time in your life when money may be tight.