Dave Ramsey signals a major withdrawal, the 401(k) strategy you can’t miss

Many Americans correctly view their 401(k) as the financial foundation they build for their future retirement plans.

But personal finance author and radio host Dave Ramsey believes another retirement strategy is also of major importance and has its own advantages.

Related: Dave Ramsey has powerful new words about buying a home and real estate

An advantage of an employer-sponsored 401(k) plan is that its growth is tax-deferred. That is, contributions grow tax-free until it’s time to start withdrawing money.

Another 401(k) feature people can take advantage of is the employer match, which provides a big boost to employees’ retirement savings. In fact, employer matching really means a 100% return on the amount of money you invest.

And contributions made to a 401(k) from one’s salary come out of the pre-tax total, reducing employees’ taxable income,

For people under 50, the investment limit in 2024 is $23,000. If you’re over 50, the limit increases to $30,500 per year.

While Ramsey believes a well-invested 401(k) is an important part of retirement savings, he also stresses the importance of another investment tool people can use to supplement it.

Dave Ramsey explains the advantages of a Roth IRA

Ramsey says a Roth IRA (Individual Retirement Account) is a vital investment device that works best when paired with a 401(k).

One advantage is that when a person retires, they can use the money in the Roth IRA tax-free. Among other reasons, because many people fear that their tax rates will be higher when they retire, this is seen as a big financial gain.

While 401(k) plans are limited to a certain number of mutual funds in which to invest, Roth IRAs offer more flexibility. It’s a good idea to work with an investment professional, Ramsey says, but people can choose from thousands of high-performing mutual funds and also diversify their holdings with different types of funds.

When a person retires, the money they have saved in a Roth IRA will stretch even further. That’s because people can withdraw money without having to pay taxes on it. This contrasts with money withdrawn from a 401(k) that is considered taxable income.

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Ramsey argues that the flexibility offered in a Roth IRA is important because the thousands of mutual funds available allow a person to balance their holdings among four types: growth, aggressive growth, growth and income, and international.

A couple is seen relaxing on a beach with a $100 bill superimposed on the sand. Dave Ramsey says it’s important to invest in a Roth IRA to supplement your 401(k).

Shutterstock/TheStreet

Ramsey says investing in two retirement accounts isn’t difficult

Having two different retirement accounts is relatively easy to manage using simple calculations, Ramsey explains.

He recommends investing 15% of your gross income for retirement. So if you earn $50,000 a year, you should put $7,500 of that into retirement savings.

The question most people have involves exactly how that money should be split between a 401(k) and a Roth IRA.

“If your employer matches contributions of up to 4 percent of your salary, for example, then you would contribute $2,000 a year to your 401(k),” Ramsey wrote on his company’s website. “The remaining $5,500 would go into the Roth IRA. Boom. You’re done!”

Related: Dave Ramsey explains the average American’s retirement, 401(k) savings.

Ramsey explains his opinion that a person’s 401(k) and Roth IRA can combine to create an optimal investment strategy. The goal should be for investments in each to balance each other.

“They should work together to help you make the most of stock market growth while limiting your risk,” Ramsey wrote.