Clark Howard explains how if you save a dollar in a Roth IRA you save $1 but it’s not the case if you do the same in a 401(k)

Saving for retirement is something everyone should be doing. Not only is Social Security at risk of getting cut, but even without a broad reduction in payments, those benefits will only replace about 40% of your pre-retirement earnings. And most retirees need close to double that amount of replacement income.

When it comes to retirement savings, you may have choices. You could choose to participate in a traditional 401(k) if your company offers one. But if you ask author and radio/podcast host Clark Howard, he’ll tell you that a Roth IRA or 401(k) makes a lot more sense.

Why Howard loves Roth accounts

On a recent show, Howard said, “I’m obsessed with the Roth as a way to save for retirement.” He also explains that if you save $1 in a Roth IRA, you get $1 in retirement — but that’s not the case if you do the same in a traditional 401(k).

With a traditional 401(k), $1 saved today is not $1 later because everything in that account will be taxed, Howard explains. And who knows what tax rates will be in place down the line?

Howard warns that today’s tax rates are historically low. And it’s his belief that eventually, Americans will be expected to pay more tax on their income.

The benefit of saving for retirement in a Roth account is that you’re locking in your current tax rate, which may be lower than your tax rate in the future.

Howard also says that people can save a lot more money with a Roth all in. And the reason is that you’ll never pay taxes on your investment gains. So if you save the same amount of money for retirement each year in a traditional account versus a Roth, you’re getting more retirement income out of the Roth.

Higher earners can use a Roth, too

For a long time, it was harder for higher earners to save for retirement in a Roth retirement plan. And the reason is that many companies’ 401(k)s did not have a Roth version.

Meanwhile, higher earners are not allowed to contribute to a Roth IRA directly. You can fund a traditional IRA and do a Roth conversion, but that’s kind of messy.

But these days, Howard says, 90% of companies that offer a 401(k) give you the choice of putting your money into a traditional or a Roth. And you may want to choose the latter for the long-term benefits.

That said, it’s a good idea to consult a qualified financial advisor and see what retirement plan they recommend you save in based on your personal situation. An advisor might recommend a Roth account, but they might also advise you to stick to a traditional 401(k) based on your current income and tax bracket.

Another thing you should know is that you don’t necessarily have to choose between a traditional retirement plan and a Roth. There’s nothing wrong with using both.

And that might be advantageous. That way, you get the benefit of shielding some income from taxes in the near term, but you also get tax-free gains and withdrawals in the long term.