Dave Ramsey Says He ‘Always’ Recommends This Retirement Account if It's Available to You

Ramsey recommends a Roth 401(k), but it's not necessarily the best option for everyone.

Picking the right retirement account is complicated. You can invest in a 401(k) with your employer if they offer one, or an IRA you open with a brokerage firm.

But, Dave Ramsey said there's one retirement account he always recommends you put your money into. He touts the benefits of it, and says it's the best option if you have it available to you -- but is it really that simple?

This is the account Dave Ramsey recommends

For Ramsey, the answer to where you should put your retirement money is simple.

"We always recommend the Roth option if your plan offers one," Ramsey said, referring to Roth 401(k)s.

Roth 401(k) plans are offered by some employers. Like other 401(k) accounts, signing up for one is simple. You don't have to pick a broker as you would if you invested in a traditional or a Roth IRA. You sign up to contribute to your Roth 401(k) and you have money taken out of your paycheck and put into a plan your employer has set up. You then pick from a limited range of investments that are available within your account and can set up automatic investments in those assets.

With a Roth 401(k) as opposed to a traditional 401(k), though, you do not get to make your investment with pre-tax dollars. You get no tax savings at all in the year you contribute to the retirement plan. Instead, your tax break is deferred. As a senior, withdrawals are tax-free, whereas with a traditional 401(k), you have to pay taxes on withdrawals.

Ramsey believes this approach is best for most people. "You pay taxes on that money now so you can enjoy tax-free growth and tax-free withdrawals in retirement."

Here's why it's not so simple

Ramsey's advice seems like it might make sense because tax-free income as a retiree sounds great. But, the reality is, this isn't a black-and-white decision because a lot depends on what makes sense for you.

In some cases, it's really hard to invest enough to earn the full amount of matching contributions your employer offers you -- and you want to be sure to do that so you don't leave money on the table. It's easier to contribute enough if you use a traditional account, since the tax savings you get in the year you make the contributions reduces the cost of investing at the time.

For example, if you want to invest $3,000 to max out your employer match and you're in the 22% tax bracket, your $3,000 contribution could save you as much as $660 on your taxes. Your take-home income after taxes and account contributions would only be reduced by $2,340. But, if you invested in a Roth 401(k), your take-home income would be reduced by the full $3,000 due to the lack of an upfront tax break.

For some people, this is the difference between being able to earn the full employer match or not -- and if that's your situation, a traditional account would likely be best. If you think you're going to pay a lower tax rate as a retiree, then deferring your tax savings until later also doesn't make sense, so a traditional account would be a better bet.

Ultimately, both a traditional and Roth 401(k) can help set you up for a more secure future so there's no real wrong answer -- but it does pay to think a little more deeply about which one to invest in rather than taking Ramsey's black-and-white advice on this issue.