As working Americans plan financially for retirement, they often turn their attention to saving and investing their income for the future.
And personal finance bestselling author Suze Orman has some important advice on 401(k) plans and Roth accounts of which people should be aware.
Orman explains that some major changes are coming and she offers recommendations on how workers can smartly handle them.
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A 401(k) is a retirement savings and investment plan in which employees contribute a percentage of their paychecks. These amounts are often matched by their employer.
Traditional 401(k) contributions are done with pre-tax dollars. This results in lower taxable income in the present, but withdrawals in the future, after a worker has retired, are taxed.
With a Roth 401(k), contributions are implemented with income after-tax. But in this case, the retirement withdrawals are tax-free.
A Roth IRA (Individual Retirement Account) involves contributions made after being taxed, without employer matches. Withdrawals for retirees are made free of taxes, but there are limits on contributions one can make.
Contribution limits are the object of Orman's focus, because important changes are on the way in the next couple years. And with a solid strategy, Americans can benefit from them.
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Suze Orman explains 401(k) contribution limits for older workers
Currently, workers planning for retirement have the option of making catch-up contributions to their 401(k)s.
In 2025, Orman explains, the regular contribution limit (for those under age 50) is $23,500. But those who are 50 or older can add a catch-up contribution of $7,500. Adding the two together makes for a total yearly limit of $31,000.
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For the first time, in 2025, workers who are between the ages of 60 and 63 will have the opportunity to contribute $11,250 to their 401(k)s. That stretches the total annual limit to $34,750.
"That can give a serious boost to your retirement security," Orman wrote.
And then the personal finance personality explained the blunt reality that level of saving will inevitably involve for most American workers.
"I know it’s a lot, but rethinking your spending might help you find the money to save more in your 401(k)," Orman wrote.
The good news, Orman emphasized, is that the payoff can be huge.
Related: Suze Orman has blunt words on Social Security for retired Americans
Suze Orman explains the math that makes saving efforts worth it
Orman provides an example involving the $31,000 limit for those 50 years old or older. If a worker can save that much for three years in a row — and assuming an annualized rate of 5% — it would grow to $102,000.
Again, assuming that average annualized growth rate of 5% per year, after another 10 years it would be worth around $165,000. In 20 years, that amount would grow to about $270,000.
Needless to say, people aged 60 to 63 have an even bigger growth opportunity because of their even higher contribution limit.
Orman also makes the point that, in 2025, workers have the option to put their catch-up contributions into traditional or Roth accounts.
Additionally, she explains that in 2026, people with higher incomes will be required to save in Roth 401(k)s.
"That’s good news as far as I am concerned," Orman wrote. "I strongly advise pre-retirees to focus on saving in Roth accounts."
Orman makes the observation that tax-free savings in those Roth accounts become more important for those who have been primarily reliant on traditional retirement accounts.
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