As American workers saving and investing for retirement are confronted with options about the best financial tools to use, bestselling author Dave Ramsey has a warning about 401(k)s and Individual Retirement Accounts (IRAs).
“Since you fund a 401(k) with pretax dollars, you won’t pay taxes now — but you will pay taxes on that money in retirement,” Ramsey wrote. “This could lead to a pretty hefty tax bill depending on what tax bracket you’re in when you retire.”
Ramsey also cautions people about limits on saving for retirement with Roth IRAs.
“You can only invest up to $7,500 in a Roth IRA in 2026 (or $8,600 if you’re age 50 or older),” he wrote. “When you compare that with the 401(k) contribution limit ($24,500 for 2026), you might be thinking, ‘That’s it?’ Yep.”
“That’s why 401(k)s and Roth IRAs work better together.”
IRS explains Roth IRA rules
Before going over Ramsey’s comments about how to work with 401(k)s and Roth IRAs simultaneously, let’s take a look at what the Internal Revenue Service (IRS) has to say about Roth IRA rules.
A Roth IRA is subject to the standard rules and regulations of a traditional IRA, with a few exceptions.
“You cannot deduct contributions to a Roth IRA,” wrote the IRS. “If you satisfy the requirements, qualified distributions are tax-free.”
“You can make contributions to your Roth IRA after you reach age 70 ½, ” the IRS continued.
“You can leave amounts in your Roth IRA as long as you live. The account or annuity must be designated as a Roth IRA when it is set up. The same combined contribution limit applies to all of your Roth and traditional IRAs.”
Now, let’s get back to Ramsey’s recommendation on using both Roth IRAs and 401(k)s.
Dave Ramsey emphasizes importance of both 401(K)s, IRAs
Ramsey recommends that workers saving for retirement should consider using both 401(k)s and Roth IRAs.
“Okay, so here’s the moment of truth,” Ramsey wrote. “Should you put your money in a 401(k) or a Roth IRA? As long as you’re debt-free (everything except the mortgage) with a fully funded emergency fund in place, the answer is . . . yes!”
“If you’re eligible for a 401(k) and a Roth IRA, the best-case scenario is to invest in both (and if you can max them both out — go for it),” he added. “That way, you’re taking advantage of your employer match and getting the tax benefits of a Roth IRA.”
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After capturing the full 401(k) match, an individual should direct further retirement funds into a Roth IRA rather than a traditional IRA to leverage its tax-free growth.
“You won’t have to pay taxes when you withdraw money from a Roth IRA, and that can pay off big-time in the long run,” Ramsey clarified.
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Vanguard explains Roth IRAs vs. traditional IRAs
Major investment company Vanguard urges people to make the most of their savings by understanding differences between Roth IRAs and tradional IRAs.
“Roth IRAs offer tax-free growth and withdrawals in retirement, while traditional IRAs provide tax-deferred growth and potential up-front tax deductions,” Vanguard wrote. “Eligibility to contribute to Roth IRAs is based on income, while anyone with earned income can contribute to a traditional IRA.”
“Contribution limits apply to both types of IRAs, but Roth IRA limits may be reduced or eliminated at higher incomes,” Vanguard continued. “Withdrawal rules and required minimum distributions (RMDs) differ between Roth and traditional IRAs, affecting your retirement strategy.”
“Choosing between a Roth or traditional IRA depends on your current income, expected future tax bracket, and retirement goals.”
Related: Dave Ramsey has blunt warning on Social Security, 401(k)s
