Dave Ramsey warns Americans on 401(k) plans

Personal finance bestselling author and radio host Dave Ramsey has a blunt warning for Americans about their traditional workplace 401(k) plans. And he recommends a lucrative alternative retirement savings strategy.

Ramsey describes a traditional 401(k) plan as a pretax account. He explains that investing this way involves making contributions to the account before they are taxed, which reduces taxable income each year.

“But all you’re really doing is kicking the can down the road, because you’ll have to pay taxes when you take that money out of your account in retirement,” he warned. “You can’t escape the tax man forever.”

Ramsey offered workers an alternative way to handle taxes through a Roth 401(k) plan, which he described as an after-tax account.

“That means your contributions go into your Roth account after they’re taxed,” Ramsey wrote. “Basically, you’re paying taxes now so you don’t have to pay later.”

Ramsey recommends using a Roth 401(k)

Traditional 401(k) withdrawals are taxed as ordinary income during retirement. By contrast, a Roth 401(k) lets one withdraw their money tax-free in retirement since they contributed using money that was already taxed.

“This may sound like something only Captain Obvious would say, but your retirement savings will last longer if you don’t have to pay taxes on your withdrawals,” Ramsey wrote. “That’s why Roth plans have a huge advantage over traditional retirement savings accounts — and why you should take advantage of all the Roth options you have.”

Ramsey offers an example of the contrast between traditional 401(k)s and Roth 401(k)s in a real-life scenario involving someone with $1 million nest egg.

“If it’s in a traditional 401(k), every penny you withdraw in retirement is subject to income taxes,” Ramsey wrote. “Depending on your tax bracket and what the tax rates are when you retire (and who knows what those will be), you could owe hundreds of thousands of dollars in taxes throughout your retirement.”

“But if your retirement savings are parked in a Roth 401(k), most, if not all (depending on how your employer structured their match under the SECURE 2.0 Act), of that $1 million is all yours, since you already paid taxes on it.”

IRS explains 401(k) plan matching contributions

Employer matching contributions are funds added to an employee’s retirement account by their employer when the worker makes salary contributions to the plan.

These matched dollars do not count toward the individual’s personal salary contribution limit, allowing the employee’s total retirement savings to expand further.

Once deposited, the matching funds grow tax-free within the account and are only subject to income taxes when the employee withdraws them in retirement.

“You may be walking away from free money by not contributing to your employer-sponsored retirement plan,” the Internal Revenue Service (IRS) wrote. “Many retirement plans, such as SIMPLE IRAs and 401(k)s, provide that your employer will match some portion of the amount you contribute to your retirement account.”

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The IRS offers a real-life scenario of its own.

“You contribute $2,000 from your $30,000 annual salary to your company’s 401(k) plan,” the IRS wrote. “Your employer’s 50% match on your contributions up to 5% of your salary means an additional $750 ($1,500 X 50%) would be added to your retirement account for the year.”

“Note, that the matching contribution is not $1,000 because the plan’s match is capped at 50% of the contributions you make up to 5% of your salary ($30,000 x 5% = $1,500 and $1,500 X 50% = $750),” added the IRS.

Fidelity explains considerations on choosing 401(k) plan

Fidelity Investments suggests a few factors to consider when deciding between a traditional 401(k) and a Roth 401(k).

“If you believe your marginal tax rate will be significantly higher in retirement than it is now, a Roth account may make sense, because qualified withdrawals may be tax-free,” Fidelity wrote.

“If you believe your marginal tax rate will be significantly lower in retirement than it is now, a traditional account may be more appropriate, because you will pay a lower tax on your withdrawals,” Fidelity added.

You may be walking away from free money by not contributing to your employer-sponsored retirement plan.

If your tax bracket remains the same in retirement, traditional and Roth IRAs yield the exact same total tax savings. However, a traditional IRA gives you immediate savings you can spend this year, whereas a Roth IRA delivers its tax savings down the road through tax-free withdrawals.

Electing to contribute to a traditional 401(k), 403(b), or IRA increases your current take-home pay by lowering your present taxable income, according to Fidelity.

“These tax savings can help you reach your retirement goal only if you invest them,” Fidelity wrote. “If you spend your tax savings, it’s not going to help you when you retire.”

“On the other hand, a contribution to a Roth account reduces the amount of money left in your pocket compared with a similar contribution to a traditional account, because you pay taxes on your contributions up front,” Fidelity continued.

“If you’re like many people who tend to spend their take-home pay, opting for a Roth and thus having less available to spend might be a good thing when it comes to your retirement savings.”

Related: Dave Ramsey has blunt warning on Social Security, 401(k)s

This story was originally published by TheStreet on Sep 25, 2026, where it first appeared in the Retirement section. Add TheStreet as a Preferred Source by clicking here.