Many Americans who are saving and investing for retirement are exploring the best methods for them to achieve maximum success.
Dave Ramsey, the best-selling author on personal finances and radio show host, tackled this issue and offered a succinct 4-word response regarding how 401(k)s and Roth IRAs can aid in accumulating funds for one’s retirement.
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Ramsey referred to these two methods as among the most potent investment tactics one could employ to achieve a comfortable retirement. He emphasized the importance of grasping the fundamental financial principles underlying each strategy.
A 401(k) is an employer-sponsored retirement savings plan that allows American workers to choose the percentage of their income they want to contribute. The money invested is tax-deferred, which means no income taxes are paid upfront. But during retirement, withdrawals are taxed.
Related: Dave Ramsey raises red flag over Social Security
Roth IRA accounts are designed for individuals to set aside a particular sum annually. They present an appealing option since they offer both tax-exempt growth and tax-free distributions during retirement. However, taxes must be settled at the time of contribution.
Ramsey examined both of these retirement savings options and offered some guidance.
Dave Ramsey shares 4 words on 401(k)s and Roth IRAs
Ramsey explained that the important truth to understand about these strategies involves figuring out the answer to the question of which one is best for the worker.
"It could be both," was his four-word response.
More on personal finance:
- Tony Robbins has blunt words on IRAs, 401(k)s and a tax fact
- Scott Galloway cautions American workers about flaws in Social Security and retirement plans.
- Dave Ramsey lays out the straightforward facts about a Roth IRA and a 401(k).
Ramsey provided additional details about the two accounts he described.
A crucial aspect of contributing to a Roth IRA is that these contributions come from income you've already paid taxes on, allowing your investments to grow without being taxed again.
"And here’s the deal," Ramsey wrote. "Once you’re ready to retire, most of the money in your Roth IRA will be growth. So, no taxes on that growth means hundreds of thousands of dollars stay in your pocket and out of Uncle Sam’s."
Americans can initiate a Roth IRA whenever they wish. In contrast to a 401(k), should an individual’s employment status change, their Roth IRA remains untouched.
A drawback associated with Roth IRAs is their contribution caps. For instance, by 2025, individuals will be able to contribute a maximum of $7,000 annually, plus an extra $1,000 for those aged 50 and over.
Related: Kevin O'Leary gives serious caution about retiring young
Dave Ramsey outlines key points about 401(k) plans.
Ramsey elucidates a fundamental aspect of how 401(k) plans operate: An employee chooses a specific percentage or fixed monetary value they want to allocate with every paycheck. This sum is then systematically withdrawn from their earnings and directed into their retirement fund.
The company match associated with 401(k) plans is a significant benefit that can be leveraged effectively. For up to a specific percentage, an employee essentially doubles their contribution continuously.
For 2025, the contribution limit For 401(k) plans, the contribution limit has risen to $23,500, up from $23,000 in 2024. Individuals who are 50 years old or above may also contribute an extra catch-up amount of $7,500, making their overall maximum limit $31,000.
Ramsey explains his advice on investing in 401(k)s and Roth IRAs for retirement savings.
If you qualify for both a 401(k) and a Roth IRA, the ideal situation would be to contribute to both accounts (and if you manage to fully fund each one—more power to you)," he stated. "This approach allows you to benefit from your employer’s matching contribution as well as enjoy the tax advantages offered by a Roth IRA.
He emphasized, 'The key to remembering where to begin is by following this principle: Match trumps Roth which surpasses traditional.' He explained further, 'A company match essentially amounts to free cash, and leaving such funds unclaimed makes little sense—thus, prioritize starting here.'
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