Suze Orman: Not Doing This With Your 401(k) Is ‘Nuts’

Many Americans take a set-it-and-forget-it approach to their 401(k) contributions, so they may be missing out on a powerful retirement savings tool that could save them thousands in taxes.

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“If you have a retirement plan through work, chances are your employer offers a great option,” money expert Suze Orman shared on LinkedIn. “Yet, for reasons I can’t understand, you aren’t signing up for this great option. I am talking about being able to save for retirement with a Roth 401(k).”

Here’s why Orman said that saving in a Roth 401(k) could end up being a very savvy money move.

Most Americans Skip This Valuable 401(k) Option

According to Vanguard data, 86% of 401(k) plans offer participants the option to save in a Roth 401(k).

“That is fantastic,” she said. “But here’s the part that has me pulling my hair out: Vanguard also reported that fewer than 1 in 5 participants who had this option chose to save in a Roth 401(k). That is nuts.”

Orman said that if you can opt into a Roth 401(k) for the coming year, you should do it — it’s easier than you might think.

“I am not talking about moving all the savings you already have in your 401(k),” she said. “All that you should change is where your new 2026 contributions go.”

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Traditional vs. Roth 401(k): What You Need To Know

The key difference between a traditional and Roth 401(k) is when you pay tax.

“With a traditional 401(k), the amount you contribute each year reduces your taxable income,” Orman said. “For example, if you earn $85,000 and contribute $10,000 to a traditional 401(k), your taxable income from those earnings is reported as $75,000.”

However, 100% of withdrawals from a traditional 401(k) are taxed as ordinary income. A Roth 401(k) has a different tax setup.

“You get no upfront tax break on the money you contribute to the account. But once you are retired, 100% of your withdrawals will be tax-free,” Orman said. “And there is no [required minimum distribution] with a Roth 401(k). You don’t have to make withdrawals at any point if you don’t need the money.”

Why Suze Orman Recommended Roth 401(k) Contributions

Orman believes that utilizing a mix of traditional and Roth 401(k) plans will set you up for financial success in retirement.

“For those of you who have spent years saving in a traditional 401(k), it would be so smart to now focus on building up savings in a Roth 401(k),” she said. “Having money you will not owe any tax on in retirement is going to be a great advantage.

“It not only will keep your taxable income lower, but it can also help keep your Medicare Part B premium lower — as it is tied to your income — and may also play into how much tax you will owe on your Social Security benefits.”

Having tax flexibility in retirement will put you at a great advantage, she said.

“If it’s an option,” Orman said, “I sure hope you will consider making the switch for 2026 and beyond.”

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This article originally appeared on GOBankingRates.com: Suze Orman: Not Doing This With Your 401(k) Is ‘Nuts’