Dave Ramsey Describes This Type of Retirement Account as a “Sweater That Protects Your Investments from the Elements.” Is He Right?

This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.

This Dave Ramsey advice could help your retirement money to grow. 

Your retirement investments are ideally going to provide you with crucial income that you need in your later years. You need to make sure you’re investing wisely, though. And that starts with picking the right type of investment or brokerage account to put your money into.

If you’re not sure what type of account makes sense, there’s one option financial expert Dave Ramsey has discussed that might be a good one to look into.

How can this account shield you from the elements?

When picking a retirement account to invest in, an Individual Retirement Arrangement, or IRA, is one option available to you.

Dave Ramsey is a proponent of these tax-advantaged accounts and offers a simple explanation for why investing in one could be a good choice. “Think of your IRA as a sweater that protects your investments from the elements—the elements, in this case, being Uncle Sam’s cold, harsh taxes,” Ramsey said.

An IRA can shield you from the elements because these types of retirement accounts come with tax breaks that a standard brokerage account wouldn’t offer. If you choose to invest in a traditional IRA, for example, you get to claim a tax deduction for contributions you make up to annual deduction limits. If you opt for a Roth IRA, you don’t get that upfront deduction but you do get to make withdrawals tax free as a retiree.

Not only do IRAs offer these tax breaks, but your money can grow tax-free in them as well. If you have assets in a taxable brokerage account that you sell at a profit, you could end up paying capital gains taxes on them in the year you make the sale.

This won’t happen with IRAs. They’ll shield you from the “elements” as Ramsey said, and allow you to just reinvest the money without having to pay a big bill. So Ramsey is absolutely correct about this advice — an IRA can serve an important, protective role as the money you hold inside it grows big enough to support you without having to continually give a piece to the government.

Should you invest in an IRA?

Ramsey is right about what an IRA can do for you, but the big question is whether you should invest in one.

For many people, the answer is yes. While you want to put enough money into a 401(k) to get your full company match if an employer offers one, an IRA can be a great place for other retirement account contributions.

Traditional and Roth IRAs both offer more investment options than 401(k) accounts typically do, and you may be able to buy investments within these accounts that have lower fees than those within your company plan. You also get to decide what brokerage holds your IRA while your 401(k) is stuck being managed by whatever administrator your employer hires.

Because IRAs come with these benefits, it’s worth looking into them. Ramsey specifically recommends a Roth over a traditional IRA to defer your tax breaks until later in life, but you can decide for yourself if you’d rather deduct contributions now or get tax-free withdrawals later. Either way, an IRA can help you avoid taxes that could eat away at potential returns in other account types — and that’s a pretty good deal.

Our best stock brokers

We pored over the data and user reviews to find the select rare picks that landed a spot on our list of the best stock brokers. Some of these best-in-class picks pack in valuable perks, including $0 stock and ETF commissions. Get started and review our best stock brokers.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

 Read More