Dave Ramsey Explains Retirement Savings Without a 401(k)

Working Americans doing their best to save for a financially healthy retirement often face a variety of challenges.

Some work for companies that offer an employer-sponsored 401(k) plan. But personal finance coach Dave Ramsey says nearly a third of US workers don’t have access to such a benefit.

The good news? There are options. And Ramsey explains that his number one recommendation is for people without access to 401(k) plans at work to invest in Roth Individual Retirement Accounts (IRAs).

An IRA works similarly to 401(k) plans at work, but they do not include contributions from employers. Workers can choose to contribute a certain amount of their annual income to a Roth IRA and even choose to schedule automatic payments.

And Ramsey believes strongly in the growth of stock mutual funds for long-term wealth creation.

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Dave Ramsey discusses why he prefers Roth IRAs

As the personal finance author and radio host at Ramsey Solutions illustrates, a big reason he recommends investing in a Roth IRA is taxes. And he notes the difference between traditional IRAs and Roth IRAs.

“With a traditional IRA, your money grows tax-deferred, so you’ll pay taxes when you withdraw it in retirement. These are the taxes on your contributions and their growth,” Ramsey wrote. “In a Roth IRA, you pay taxes up front when you contribute, which means your money grows tax-free (music to our ears) and you can withdraw it tax-free in retirement (even better music!).

While Ramsey thinks Roth IRAs are the best option for retirement accounts, he acknowledges some important drawbacks to them that people should consider.

One is that there is no employer match. Another downside is that a Roth IRA includes a lower contribution limit than a 401(k).

For 2024, one can contribute $7,000 to a Roth IRA. That amount increases to $8,000 for those 50 and older.

That compares to the 401(k) contribution limit of $23,000 a year, which adjusts to $30,500 for those over 50.

More about Dave Ramsey

Ramsey further explained the advantages of paying taxes at the time of investment.

“Since you pay taxes on the money you put into your Roth IRA when you invest it, you’ll be able to use your retirement savings tax-free,” he wrote. “That means if you contribute the maximum amount each year, you could have a nest egg worth almost $1.5 million after 30 years… And you won’t have to pay a penny in income tax when you withdraw it money in retirement.”

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Ramsey explains how to qualify for a Roth IRA

The requirements for an individual to invest in a Roth IRA are fairly simple. Eligibility in 2024 involves several income considerations.

First, a person must have demonstrable earned income. That total minus tax deductions must be less than $230,000 for married couples filing jointly, or $146,000 for people who are single.

Related: Dave Ramsey has sharp new words for workers who take vacation time

People can also roll over their previously earned 401(k) amounts into an IRA. This is called a 401(k) rollover.

A direct 401(k) rollover can be applied to move a traditional 401(k) into a traditional IRA account or a Roth 401(k) into a Roth IRA account tax-free.

One important thing to note, Ramsey wrote, is that a return does not count against a person’s contribution limit.

Ramsey also had some other words of advice about reversals.

“You can roll over your traditional 401(k) to a Roth IRA (a Roth conversion), but there are major tax implications to consider which means it may not be the right solution for everyone,” Ramsey wrote.

“And you should never withdraw the money yourself to roll it over (aka an indirect rollover) don’t even touch it! This is considered an early withdrawal and you’ll get a 10% early withdrawal penalty plus a bill big tax “.

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