Dave Ramsey: How To Determine Which Retirement Accounts Are Best for You

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When it comes to retirement accounts, there are plenty of options, particularly of the tax-advantaged variety. To understand which ones offer you the best opportunity to build your nest egg, it’s important to learn the differences and similarities among them.

To that end, Ramsey Solutions, founded by famous financial personality Dave Ramsey, published a recent article outlining the specifics. Here are the highlights.

Employer-Sponsored Plans

Pension plans used to be the most common employer-provided retirement plan, particularly among large companies. A pension guarantees a lifetime income, typically based on a combination of an employee’s salary and years of service. But these types of plans have been phasing out at a rapid pace, primarily because they are expensive and they place all risk on the employer to make payments.

In place of these so-called “defined benefit” plans have come “defined contribution” plans, like 401(k)s. In these plans, employees are responsible for making contributions, and there is no guarantee of a payout at retirement — you’ll only receive the value of your account balance, whatever it reaches.

This absolves employers of the burden of making lifelong payments, although most make voluntary matching contributions on behalf of employees as well. If you are a teacher or government worker, you might be offered a 403(b) plan instead, which is similar to a 401(k) plan but is instead offered to nonprofit or tax-exempt organizations.

Thrift savings plans are another type of defined contribution plan. They are a bit more limited than 403(b) and 401(k) plans in that they only have five different fund options to invest in, and they are offered only to military and federal workers. 

In all instances, employer-sponsored retirement plans can be either traditional or Roth plans. Traditional plans are funded with pre-tax dollars, and withdrawals are fully taxable. With Roth plans, contributions are funded with after-tax dollars, but qualifying withdrawals are tax-free.

Individual Retirement Accounts

Individual retirement accounts may be a good option if you aren’t covered by a retirement plan at work. As the name suggests, individual retirement accounts, or IRAs, are run by individuals rather than companies.

While there are some limitations to IRAs — such as the fact that they have a much lower contribution limit than 401(k) plans — one of their main advantages is that they generally have much more investment flexibility. While a 401(k) or 403(b) plan typically only offers a handful of mutual funds to choose from, an IRA is essentially an open field. You can buy individual stocks, bonds, mutual funds, ETFs or nearly any type of investment product. 

As with employer-sponsored plans, you can choose either a traditional or a Roth version of an IRA, with the corresponding tax consequences. You can contribute to a traditional IRA no matter what your income is, but a Roth IRA has an income limit in 2024 of $161,000 for single filers and $240,000 for joint filers.

Taxable Investment Accounts

A taxable investment account is what most people consider a “regular” account. If you open an account with a broker and want to trade stocks, for example, you’ll likely end up with a “regular,” taxable investment account.

While there aren’t many restrictions on a taxable investment account, such as contribution or investment limits, there is a major drawback. Every trade you make in this type of account becomes a taxable event. In a tax-advantaged account like an IRA or 401(k), you can buy and sell stocks all day without paying any taxes until you withdraw your money from the account. But in a taxable investment account, you’ll have to pay taxes every time you receive dividends or interest, and every time you sell a stock for a profit.

While Ramsey suggests using tax-advantaged accounts as much as possible, if you have maxed them out and still have money to save, a taxable investment account is a good option.

Small Business Retirement Accounts

If you’re self-employed or run a business, you have access to an entirely new set of retirement accounts. This is true even if you are a freelancer or a contractor and may not think of yourself as “owning your own business.” 

The three main types of small business retirement plans are the solo 401(k), the SEP-IRA and the SIMPLE IRA. Each has its own specifications, but all share the same tax benefits — the tax-deductibility of contributions and the tax deferral of gains and income until distribution. Important to note, however, is that SEP-IRAs require contributions on behalf of employees as well, so they can be costly unless you are the only worker. 

For 2024, the maximum allowable contribution to both solo 401(k) and SEP-IRA plans is 25% of your compensation, up to a maximum of $69,000. SIMPLE IRAs have limits of $16,000, or $19,500 if you’re age 50 or older. 

The Bottom Line

As the jumbled landscape of retirement accounts can be confusing, Ramsey suggests that you work with a financial advisor to make sure you are maximizing your retirement returns. If you have the chance to participate in a 401(k), for example, you should make sure to contribute at least enough to get your full employer match, if any.

As you may be able to use more than one retirement plan at a time, a licensed financial advisor will help steer you in the right direction.

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