The Overlooked Advantage of Roth 401(k) Plans: What High Earners Need to Know

When it comes to retirement planning, most American workers have access to employer-sponsored 401(k) plans. However, many face a critical choice they don’t fully understand: traditional versus Roth contributions. While 85% of employer plans now offer a Roth 401(k) option, fewer than one in five workers actually use it, according to Vanguard’s research. This low adoption rate represents a potentially costly oversight in long-term wealth building.

Financial expert Suze Orman has been vocal about this trend, warning that Americans may be missing significant tax advantages by defaulting to traditional 401(k) accounts. Her reasoning reveals three overlooked benefits that make Roth 401(k) plans particularly strategic for workers across all income levels.

Breaking Through Income Barriers

One of the most misunderstood aspects of retirement savings involves income eligibility. Roth IRAs, while tax-advantaged, come with strict income restrictions. For 2025, single filers begin phasing out at $150,000 and are completely ineligible once they exceed $165,000. Married couples filing jointly face thresholds of $236,000 to $246,000.

Roth 401(k) plans eliminate this barrier entirely. High-income earners who are typically shut out of Roth IRA contributions can fully participate in Roth 401(k) accounts regardless of salary. Orman emphasizes this point forcefully: “I don’t care what tax bracket you’re in. You have to be crazy to do anything other than a Roth retirement account,” she told CNBC. For professionals in upper income tiers, this accessibility transforms the Roth 401(k) into a critical wealth-building tool that standard financial advice often overlooks.

Tax-Free Withdrawals and Diversification

Traditional 401(k) contributions offer immediate tax relief, which sounds appealing. However, this benefit comes with a hidden cost: distributions in retirement are fully taxable as ordinary income. In contrast, Roth 401(k) contributions are made with after-tax dollars, but qualified withdrawals later are entirely tax-free.

According to Orman, this structure provides meaningful flexibility. “When you eventually make withdrawals from a Roth 401(k), the money will be tax-free if you follow a few simple rules,” she notes. Beyond the tax savings, maintaining both traditional and Roth 401(k) accounts creates tax diversification—a strategy that allows retirees to strategically choose withdrawal sources based on their annual tax situation. Workers who have already accumulated substantial traditional 401(k) balances should consider shifting new contributions to Roth accounts to build this protective layer.

Avoiding Forced Distributions and Healthcare Costs

Required Minimum Distributions (RMDs) represent an often-dismissed consequence of traditional retirement accounts. Starting at age 73, the IRS mandates annual withdrawals from traditional 401(k) plans, and these withdrawals count as taxable income—regardless of whether the money is needed.

This seemingly technical requirement carries real financial consequences, especially regarding Medicare. Part B premium amounts are directly tied to modified adjusted gross income. Larger withdrawals from traditional accounts inflate reported income, which automatically increases Medicare costs. Roth 401(k) plans sidestep this problem. Unlike traditional plans, Roth accounts have no RMD requirement, and withdrawals at age 59½ (after a five-year holding period) remain tax-free.

Orman highlights this advantage: “Being able to keep those withdrawals lower by having tax-free money available in Roths can mean you will have a lower Medicare Part B premium.” For retirees managing multiple income sources, this flexibility to control taxable income becomes a powerful tool for optimizing overall healthcare and tax expenses.

The Strategic Case for Action

Employer-sponsored 401(k) plans represent one of the most valuable retirement benefits available to American workers. The choice between traditional and Roth is not merely an accounting question—it shapes decades of financial outcomes. While traditional 401(k) contributions remain a solid foundation for many workers, the three-part advantage of Roth 401(k) plans—unlimited income access, tax-free growth, and withdrawal flexibility—deserves serious consideration for those with the option. Workers who overlook this choice may find themselves unnecessarily constrained by tax obligations in retirement.