Suze Orman reemerged this week with renewed criticism of traditional 401(k) plans, and pleaded for people to instead use a Roth 401(k) or Roth IRA for retirement saving.
Appearing on the award-winning Pivot Podcast this week, co-hosted by technology journalist and entrepreneur Kara Swisher and NYU professor Scott Galloway, Orman offered advice on what she thinks retirement savers should be doing during the COVID-19 pandemic.
“Please, if you have the ability to do a Roth 401(K), 403(b), or a TSP, or a Roth IRA, those are the type of retirement accounts that you want to be in. Stay away from the traditional ones… where you get a tax write-off today but in the long run when you go to take your money out you’re going to have to pay taxes on it,” Orman said on the podcast.
“With a Roth, you pay taxes today, and in the long run, when you take it out, it’s tax-free,” she added.
Why is this a good strategy, Orman continued?
“Do you really think that tax brackets aren’t going to have to go up five, 10, 15 years from now in order to pay for all the debt that we’re carrying? Of course they’re going to have to,” she said. “I would rather pay the taxes today when we’re in the lowest tax brackets of a long time still, and let the money grow tax-free vs. tax-deferred.”
Not her first time stumping for Roths
Orman was on the Roth train long before the pandemic came around. In a May 2, 2019 post on her website, Orman said, “You know I am a huge believer that the best way to save for retirement is a Roth Individual Retirement Account (IRA). But there’s actually something even better. A Roth 401(k). And there’s an increasingly high chance you can save in a Roth 401(k) through work.”
She referenced the Callan Defined Contribution Trends survey of large employers, showing more than 80% of plans offer a Roth 401(k) in addition to a traditional 401k (the 2020 Callan survey shows the prevalence of Roth accounts in DC plans has increased from 61.6% in 2015 to 87.1% in 2019).
“If your plan offers the Roth 401(k), I think you should definitely grab it,” Orman said in the 2019 piece. “Check with the plan or H.R. If you tend to tune out emails and meetings about new plan features, you may not even be aware the Roth option was added since you enrolled in the plan. It’s easy to make the switch.”
Pandemic brings her back to forefront
The polarizing financial advisor, author and “Women & Money” podcast host gained widespread notoriety through “The Suze Orman Show,” which ran on CNBC from 2002-2015 (and occasionally parodied by Kristen Wiig on Saturday Night Live), where she took calls from viewers and scolded them for buying things they know they can’t afford.
The now 69-year-old faded from the limelight somewhat around four years ago after she and her wife moved full-time to the Bahamas, but her weekly podcast and a recently released book, “The Ultimate Retirement Guide for 50+: Winning Strategies to Make Your Money Last a Lifetime,” started a resurgence. And then the pandemic hit, and she became almost as in demand from her core audience as Lysol wipes.
“Let’s think about what just happened a few months ago. You had people making $150,000, $200,000 a year, and they were spending every single penny that they were making. They had no savings at all,” Orman said on the Pivot Podcast. “Do you know that 60% of the people in the United States, before COVID had $400 or less in their savings account?”
When the pandemic cost many of them their jobs, she noted how it immediately thrust many into financial dire straits.
“If you had listened to me, you had eight months of an emergency fund,” she said, adding “these people didn’t have to worry about it.”
Orman said in a recent New York Times article about her being back in the limelight that she hopes to live in a world where taxes on the wealthy “skyrocket,” and that she sees a “trail of devastation” left by President Trump where many people won’t recover.
Pretty much all of the high-profile financial gurus out there—Dave Ramsey, Jim Cramer and a handful of others including Orman—are controversy lightning rods for their advice and are often maligned by in-the-trenches financial advisors.
Indeed, many 401(k) advisors spend all too much time dispelling some of the mainstream media financial advice in meetings with clients. But the “Traditional 401(k) vs. Roth 401(k)” question is a legitimate one, and one advisors are increasingly likely to deal with in those meetings. It’s worth recognizing that many participants are hearing from the likes of Ramsey and Orman that the Roth 401(k) is the one they recommend, as have many top 401(k) advisors in the proper circumstances.