Dave Ramsey Warns 401(k)s May Fall Short — AARP Concurs, Urges Adding A Roth IRA

401(k)s are one of the most powerful retirement investing instruments in the US, with multiple tax benefits, free money from matching employer contributions, and considerable annual contribution limits. You can even start withdrawing funds penalty-free starting at the age of 59 ½.

However, financial guru Dave Ramsey had stated in an explainer on his website that simply investing in 401(k) might not be enough amid rising inflation and living costs. Ramsey believes that a 401(k) could fall short in retirement if the investments are weak, high expense ratios cost you significantly in fees over decades, as well as the absence of a Roth individual retirement account (IRA).

On the last point, even the American Association of Retired Persons (AARP), nonprofit for those above the age of 50, concurs with Ramsey's strategy of using both 401(k) and IRAs.

Using A Roth IRA For More Investment Choices

Ramsey had noted that most US firms collaborate with a brokerage firm to administer 401(k) plans for employees, which often limit the account holders to limited investment options, primarily in mutual funds and target-date funds.

'You might look at your options and feel underwhelmed. If that's the case, pick the best options available and invest up to the match. Then invest in a Roth IRA where you have more control,' Ramsey had advised.

Think of a Roth IRA as a personal investment tool that operates independently of employers, offering account holders total control over contributions and access to relatively more investment choices. Roth IRA contributions are post-tax dollars. So, you enjoy tax-free growth as well as withdrawal in retirement. In contrast, 401(k) withdrawals incur taxes.

'The best tool you can use for investing beyond your 401(k) is a Roth IRA. We surveyed more than 10,000 millionaires in our National Study of Millionaires. A huge majority (74%) said they invested outside of their workplace retirement plan. This isn't an either/or situation — it's both/and,' Ramsey had noted.

Note that the annual contribution limits for Roth IRAs stood at $7,500 in 2026, while that of 401(k)s is $24,500.

Backdoor Roth IRAs Used By The Wealthy

Tax liabilities grow as your wealth multiplies. The wealthy often employ a host of tax-saving strategies to avoid paying taxes, evidenced by the US Treasury's estimate that over $150 billion in taxes owed by the top 1% goes unpaid annually.

One of those strategies is a backdoor Roth IRA. Interestingly, PayPal founder Peter Thiel grew his $1,700 Roth IRA account to $5 billion, which he will withdraw completely tax-free.

While people choose traditional IRA accounts for more personalised investment options while growing their pre-tax contributions tax-free, withdrawals from traditional IRA funds are taxed as regular income.

Apart from the tax benefits in retirement for Roth IRA, this account type also does not compel you to require minimum distributions after a certain age like most 401(k) accounts. However, Roth IRA accounts can be opened by individuals with a modified adjusted gross income under $161,000 for the current financial year or $240,000 for those filing jointly.

While these income limits do not allow high earners from opening Roth IRA accounts, they often bypass these constraints by creating a backdoor Roth IRA. It involves converting your traditional IRA into a Roth IRA, where you pay taxes on pre-tax traditional IRA contributions and capital gains only once and never again on Roth IRA withdrawals. The wealthy prefer this tax strategy, given that there's no income limit for opening a traditional IRA or conditions on who can roll over IRAs.

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