Dave Ramsey Advice on Retirement, 401(k)s, and Roth IRAs

Dave Ramsey’s Advice on Retirement, 401(k)s, and Roth IRAs

When planning for retirement, many American workers consider investment options like 401(k)s and Individual Retirement Accounts (IRAs). Personal finance expert Dave Ramsey supports both but highlights key advantages and disadvantages of each.

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Dave Ramsey’s Advice on Retirement

Understanding 401(k)s and Roth IRAs

A 401(k) plan is an employer-sponsored retirement account where employees contribute a portion of their salary, often with an employer match. Contributions are tax-deferred, meaning taxes are paid only when withdrawals begin in retirement.

A Roth IRA, on the other hand, allows individuals to invest after-tax income. The key benefits include tax-free growth and tax-free withdrawals in retirement.

Disadvantages of 401(k) Plans

While 401(k)s offer higher contribution limits and employer matches, Ramsey points out some drawbacks:

  • Limited investment choices: Employees can only choose from funds selected by their employer’s plan administrator. Roth IRAs, however, provide thousands of mutual fund options.
  • Taxes on withdrawals: While contributions are made pre-tax, withdrawals in retirement are taxed.
  • Required withdrawals: Account holders must start withdrawing funds by age 73 (if they turned 72 in 2023 or later) to avoid penalties.

Key Considerations for Roth IRAs

  • Lower contribution limits: In 2024, individuals can contribute up to $7,000 ($8,000 for those 50 and older), whereas 401(k) plans allow up to $23,000.
  • Five-year rule: Withdrawals from a Roth IRA are only allowed five years after the first contribution.
  • Early withdrawal penalties: Taking money out before age 59½ can lead to taxes and penalties, though careful planning can help avoid this.

Ramsey’s Retirement Strategy

Ramsey recommends using both a 401(k) and a Roth IRA to maximize benefits. Workers can take advantage of employer-matching contributions in a 401(k) while also benefiting from the tax-free withdrawals of a Roth IRA.

Additionally, many companies now offer Roth 401(k) plans, which combine the advantages of both.

By strategically investing in these retirement accounts, workers can build a more secure financial future.

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