Dave Ramsey is recommending that his listeners no longer make contributions to their traditional 401k plan. I explain why. Dave explains that with your 401k you would have to pay taxes on all your draws and the tax rates could be significantly higher when you retire. He’s basically saying to put money into tax-deferred accounts while tax rates are high, so that you can enjoy lower tax rates during your retirement years. What is Dave recommending instead of a 401k? The Roth 401(k). I might agree with him…watch to find out what I think is still missing from his claim.
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LEARN MORE ABOUT: 401k Plans
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For many Americans, a 401k plan is the primary means of saving for retirement. It is a tax-advantaged investment account offered by employers, which allows employees to contribute a portion of their pre-tax income towards retirement. However, personal finance guru Dave Ramsey thinks that investing in a 401k is not the best option for building your retirement nest egg. In this article, we will explore his reasons for this stance and whether they are valid.
1. Limited Investment Options
One of the main drawbacks of a 401k plan is the limited investment options available. Employers set the investment options available to their employees, and these options may not align with an employee’s investment goals or risk tolerance. In contrast, an individual retirement account (IRA) offers a broader range of investment options, including stocks, bonds, and mutual funds.
2. High Fees
Another reason why Dave Ramsey advises against 401k plans is the high fees charged by many investment firms. These fees can eat into your investment returns and substantially reduce your retirement savings over time. By contrast, an IRA has lower fees, allowing investors to keep more of their investment returns.
3. Lack of Control Over Your Investments
With a 401k plan, the employer has control over the investment options available to employees. This means that you may not have a say in how your retirement funds are invested. In contrast, with an IRA, investors have more control over their investment choices and can tailor their investment strategy to meet their specific needs and risk tolerance.
4. Penalty for Early Withdrawal
A 401k plan is subject to a penalty for early withdrawal before age 59 ½. This can be a significant problem for those who need access to their retirement funds for an emergency or unforeseen expenses. In contrast, an IRA offers more flexibility as it permits penalty-free withdrawals for certain qualified expenses, including education and first-time home purchase.
5. Market Risks
The stock market is inherently unpredictable, and one of the most significant risks with 401k plans is the potential for market volatility to negatively impact your retirement savings. Many investors have experienced significant losses during market downturns, making it important to have a diversified investment portfolio with a range of assets, including bonds and stocks.
In conclusion, while a 401k plan can be a useful tool for saving for retirement, it is not without its drawbacks. Dave Ramsey believes that IRA plans offer more flexibility and control over investment options and fees. However, it is essential to remember that personal finance is a highly individualized area, and what works for one person may not work for another. Always consult with a financial advisor to determine the best investment plan for your unique needs and circumstances.
401k is terrible!!! You can make 50x more if you just buy real estate with money you would put in 401k. It's sort of passive income and you just sell the houses when you retire and you'll be a millionaire if you have 4 homes….lot easier than majority of poor Americans think
Great advice about utilizing the standard deduction as opposed to not to
When you have a 6% match it's hard to give up free money.
I am normally not one to defend Dave Ramsey, however, there are two points you make that I disagree with. First, I am fairly certain Dave has encouraged the Roth 401(k) and IRA for years. His line of thought is to contribute to the match no matter what and choose Roth if offered. Second, you also have to consider Dave's primary audience when you mention PLI. They are mostly middle-class folk paying off debt, building an emergency fund, and starting to save for retirement. Should these people be putting a couple hundred $ per month into PLI? Probably not. Moreover, the majority of PLI policies sold today are not properly structured or funded, which could lead to a lot of heartaches later in life if you are relying on it as a retirement income stream.
What about of the health insurance in retirement? Its price is based on ur income . According to Goldman Sachs there rich clients use the Obama care. That's why roth is better.
Absolutely annoying voice and delivery! On to the next…
I max out both 401k and roth 401k in my job, this is 100% why I am currently a millionaire. My highest take home pay to date is $36,500.
I wonder how the extra 33% contribution from an employer plays into this plan?
Dave Ramsey, has been in this "Game" for decades and has always been promoting "Securities", Mutual Funds such as 401K's, IRA's, etc…The Tax impact on 401K's, 403B's, non-Roth IRA's, have always had this negative tax consequence, so why in 2023, he is just now preaching the truth? I'm sure he still hates non-term Life and Annuities, but there are legal tax advantages in these products, if done correctly. Taxes are only going in one direction, we are 34 Trillion in Debt, taxes will not be lower when you are older!
While he'll never give you any credit Dave, at least the other Dave is swerving into the truth a little bit. Keep up the good work, you're helping a lot of people.
On the money dave… but actually the number i have seen is that NINETY ONE percent of 65 yo couples will have at least one spouse need LTC before death. 64% for men and 76% for women.