When I first read, Total Money Makeover, back in 2003, I was excited to find another personal finance expert that shared my recommendations regarding saving for retirement.
One of Dave’s core tips regarding investing is,
Get your free money first with your 401(k) match. After that, take advantage of the Roth IRA to get your tax-free money. Then go back to the 401(k) and max it out.
This is the same advice that I’ve been giving to individuals ever since I became a financial advisor.
But over the last year or so my opinion has changed. What I’ve realized is that the majority of people that save in their 401(k) s have no idea what they’re doing.
They’ve usually let their employer decide where to put their money and they never really have no clue in what they are investing into.
Are you one of these people?
Because of this, I have changed what I believe.
Yes, that’s right Dave.
I’m a big believer and lover of tax-free money and, if available, to me I’d max out my Roth IRA in a heartbeat.
Unfortunately, I’m one of the unlucky ones that doesn’t qualify. 🙁
Note: Not sure if you qualify? Check out the most recent Roth IRA Rules.
So you’re probably wondering why would I advocate first going to the Roth IRA instead of the 401(k)?
I don’t blame you for questioning. Here’s my logic….
What I See
I believe that people need to have more of a hands-on approach with their investments. By having to open a Roth IRA it requires you to go out and do research in where the best place is to open a Roth IRA.
You’ll then have to figure out a way to get the money into it, and forced to learn how to choose the investments you place inside it. At worst, you’ll have to sit down with a financial planner to help you make sense of it all.
Essentially, it makes you do some work; it makes you have some stake in the game – your game!
Without any stakes in the game you’ll just go through the motions and never really know where or how your money’s being invested.
What About Taxes?
Is there some flaws in my logic? Of course there is! Any tax expert could punch holes in this concept all day long.
But here’s what I know: I’ve talked to several, potentially hundreds of people over the years that don’t have the slightest clue what they are doing with their retirement money which is most often their 401k.
This needs to stop.
You think Dave Ramsey will call me nuts?
Let me know in the comments below.