Should I Open a Traditional IRA Just for the Tax Benefits?

Summary

Ramsey Everyday Millionaires: Episode Summary Episode Title: Should I Open a Traditional IRA Just for the Tax Benefits? Release Date: July 23, 2025 Host/Authors: Dave Ramsey, Ken Coleman, George Kamel, Rachel Cruze, Jade Warshaw, and Dr. John Delony

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Introduction to Lisa's Financial Situation

In this episode, Lisa from Milwaukee reaches out seeking advice on optimizing her retirement savings and managing her tax liabilities. Having started a business in 2023, Lisa experienced modest earnings initially but saw significant income growth in 2024. As she prepared her taxes for the year, she became concerned about her potentially high tax bill and inquired about strategies to reduce it.

Key Points:

• Business Growth: Launched in 2023 with low initial income; substantial improvement in 2024.
• Tax Concerns: Anticipates a high tax bill due to increased income.
• Current Retirement Savings: Holds a self-directed Roth IRA.

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Evaluating Traditional IRA vs. Roth IRA

Lisa's tax preparer suggested several retirement account options to help mitigate her tax burden, including a Traditional IRA, SEP IRA, and self-directed 401(k). However, Lisa is primarily considering a Traditional IRA for its immediate tax benefits.

Dave Ramsey's Insights:

• Tax Implications: Transitioning from a Roth to a Traditional IRA shifts the tax payment from now to the future. "With the Roth side, you're paying taxes now and then never again..." (01:20).
• Recommendation: Ramsey advises maintaining the Roth IRA, emphasizing that avoiding taxes entirely isn't feasible. Instead, he suggests focusing on reducing taxable income through deductions and credits rather than switching to a Traditional IRA solely for tax savings. "I don't think it's worth switching to the traditional side just to save a little bit on taxes." (01:20).

Conclusion: Ramsey recommends continuing with the Roth IRA rather than switching to a Traditional IRA for tax benefits, highlighting the importance of long-term tax strategy over short-term savings.

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Exploring Additional Retirement Account Options

Lisa inquires whether she should establish another retirement account beyond her self-directed Roth IRA, especially since her business expenses—and consequently her deductions—have significantly decreased.

Dave Ramsey's Response:

• Limited Options: "You're out of options as far as Tax advantaged retirement accounts." (02:22).

Conclusion: Given her current financial landscape, additional tax-advantaged retirement accounts may not offer substantial benefits for Lisa at this stage.

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Health Insurance and Health Savings Accounts (HSA)

Dave shifts the conversation to Lisa's health insurance, a crucial aspect given her medical history.

Lisa's Health Profile:

• Insurance Plan: HMO through the Marketplace.
• Monthly Cost: $600.
• Medical History: Diagnosed with cancer four years ago.

Dave Ramsey's Recommendation:

• Health Savings Account (HSA): If Lisa were on a high-deductible health plan (HDHP), she could leverage an HSA for tax-advantaged savings and investment, effectively serving as an additional retirement account. "You can do a health savings account and you can actually invest through there with tax advantages." (02:45).
• Alternative Investments: Suggests considering a taxable brokerage account with investments in S&P index funds if an HSA isn't available. Clarifies that while this doesn't offer tax advantages, it provides another avenue for investing. "It wouldn't give you a tax advantage, but it's another way to invest." (03:15).

Conclusion: Since Lisa is enrolled in an HMO rather than an HDHP, an HSA may not be a viable option for her. Therefore, she might consider a taxable brokerage account for additional investments.

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Addressing Debt Repayment and Establishing an Emergency Fund

The conversation takes a critical turn as Dave assesses Lisa's debt situation and financial stability.

Lisa's Debt Profile:

• Credit Card Debt: Previously substantial; paid off $10,000 in 2023 and $50,000 recently.
• Remaining Debt: $17,000 in student loans.
• Emergency Fund: Lacking, leading to reliance on credit cards during medical leave.

Dave Ramsey's Strategic Advice:

• Prioritize Debt Elimination: "I would pause all investing... knock out the student loans." (03:58).
• Establish an Emergency Fund: Critical to prevent reverting to credit card debt in the event of unforeseen expenses. "Get an emergency fund. Because right now you are skating on some thin ice." (03:58).

Conclusion: Ramsey emphasizes that Lisa should halt additional investments temporarily to focus on eliminating her student loans and building a robust emergency fund. This foundational financial stability is essential before resuming investment activities.

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Final Affirmations and Encouragement

Lisa concurs with Ramsey's advice, expressing relief at receiving confirmation on her financial strategy. George Kamel and the crew offer additional support and encouragement, reinforcing the guidance provided.

Notable Quotes:

• Dave Ramsey on Tax Strategy: "I don't think it's worth switching to the traditional side just to save a little bit on taxes." (01:20).
• Ramsey on Emergency Fund Importance: "Get an emergency fund. Because right now you are skating on some thin ice." (03:58).
• George Kamel's Support: "Going to hit the mark." (04:36).

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Conclusion and Takeaways

In this episode, Ramsey Everyday Millionaires delves into the nuances of retirement account selection for self-employed individuals. Through Lisa's real-world scenario, the discussion highlights the importance of prioritizing debt elimination and establishing an emergency fund over seeking immediate tax benefits through retirement account adjustments. The hosts provide compassionate and practical advice, ensuring listeners understand the foundational steps necessary for long-term financial stability and wealth building.

Key Takeaways:

• Roth vs. Traditional IRA: Favor Roth IRA for long-term tax strategy unless immediate tax savings are a higher priority.
• Additional Retirement Accounts: Assess their viability based on current financial circumstances and business expenses.
• Health Savings Accounts: Utilize if available, but explore other investment avenues otherwise.
• Debt and Emergency Funds: Prioritize eliminating high-interest debt and building an emergency fund before advancing investment strategies.

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For more insights and personalized financial advice, connect with a SmartVestor pro at ramseysolutions.com/smartvestor.

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Timestamp References

• 01:20 Dave Ramsey discusses Roth vs. Traditional IRA.
• 02:22 Dave Ramsey notes the limited options for Lisa’s retirement accounts.
• 02:45 Dave Ramsey explains the benefits of an HSA.
• 03:15 Dave Ramsey clarifies investment options without tax advantages.
• 03:58 Dave Ramsey emphasizes debt repayment and emergency funds.
• 04:36 George Kamel offers final encouragement.

Transcript

[Dave Ramsey]

This episode is brought to you by SmartVestor. Connect with an investing pro near you at RamseySolutions.com SmartVestor Lisa from Milwaukee is up next.

[George Kamel]

Lisa, how can we help?

[Lisa]

Hi George and Ken, thank you so much for taking my call. You bet. My question, a little bit of a background. I started a business in 2023 and it took a little time to get it ramped up. So I didn't make that much in 2023 so that I paid were relatively low. But in 2024 I did much better. And as I was giving all my documents to my tax preparer, I said, oh my gosh, I'm sick. I can just imagine how much I'm going to have to pay in taxes. Is there anything I can do to reduce my tax bill? I'm in real estate and I said aside from purchasing properties, I'm not in that mode yet. And he said that I could I have a Roth, a self directed Roth ira, but that won't reduce my tax bill. He said I could open a traditional IRA, a step simple IRA or self directed 401k. But at this point my only option is a traditional IRA for 2024 tax benefits. Is it beneficial for somebody self employed to open a traditional IRA for tax benefits?

[Dave Ramsey]

Well, I mean you're just switching it up. So with the Roth side, you're paying taxes now and then never again. And so what you're saying is, well, I'd rather not pay the taxes now, but one day when you go to withdraw that money, you going to pay taxes on it. So there's no way to really avoid the tax man. You're going to do it on either side. And I would, if I'm in your shoes, I would just stick with the Roth. I don't like doing anything for the tax benefit. I know it stinks to pay taxes, but it's just part of making an income in America today. And so I would do any other thing you can do to reduce your taxable income through deductions and credits. But I don't think it's worth switching to the traditional side just to save a little bit on taxes.

[Lisa]

Should I have an additional retirement account besides the self directed Roth IRA for any. Because my expenses for my business, my startup expenses, I had some, some more but now my expenses are very minimal. So the amount of deductions that I have are very small. So the only thing that he said that could reduce is either purchasing real estate, which again isn't my.

[Dave Ramsey]

You're out of options as far as Tax advantaged retirement accounts.

[Lisa]

Okay.

[Dave Ramsey]

Do you have a health insurance plan?

[Lisa]

I'm through Marketplace. I was diagnosed with cancer four years ago, so my health insurance is astronomical.

[Dave Ramsey]

Is it a high deductible plan or is it PPO? Do you know what it is?

[Lisa]

I believe it's HMO, but based on my income, it's $600 a month.

[Dave Ramsey]

Essentially. I was asking because if you have a high deductible health care plan, you can do an hsa, which is a health savings account and you can actually invest through there with tax advantages. So it kind of becomes a bonus retirement account in that way, you know, outside of your, your Roth ira. Beyond that, beyond the hsa. A Roth ira. If you have no other options that you can do, you could always go to a taxable brokerage account, not non retirement, and just dump money in there into some S and P index funds.

[Lisa]

Okay. And that, that would give me a tax advantage then.

[Dave Ramsey]

It wouldn't give you a tax advantage, but it's another way to invest. If you, if you're not hitting that 15%. Are you debt free with an emergency fund currently?

[Lisa]

Oh. So for two years when I was healing cancer, I didn't work at all. So I was living off of credit cards. So in 2023 I paid off about 10,000 and this past year I paid off the remaining 50,000 in credit cards and I, well, I should feel great, right? Because my income is still unpredictable. It really took everything. Besides, I had enough money. I didn't know how much I was going to pay in taxes. But. So where are you at now in terms of your debt being debt? So no credit card. I do, I do have about 17,000 remaining on a student loan which I was hoping to tackle this year.

[Dave Ramsey]

Okay. If I was in your shoes and again you called our show, this is the way we do it. I would pause all investing, you know, this and knock out the student loans. Get an emergency fund. Because right now you are skating on some thin ice. All it takes is one more emergency and you're back to using the credit cards.

[Lisa]

Yep.

[Dave Ramsey]

It's going to move you backwards and you're not going to be able to build wealth because you're going to be dealing with all these ankle biter things. And so getting rid of that debt, getting the emergency fund in place should be your A1 before you get to investing.

[Lisa]

Okay. I thought you would say that, but I wanted confirmation.

[George Kamel]

There you go.

[Dave Ramsey]

You got it. We are here for you ladies.

[George Kamel]

I'm telling you, the clock and George Camel got the same consistency.

[Dave Ramsey]

I'm ticking.

[George Kamel]

Going to hit the mark.

[Dave Ramsey]

Thanks for tuning in to Ramsey Everyday millionaires Need help with your investments? Connect with a Smartvestor pro at ramseysolutions. Com smartvestor or click the link in the show notes. Ramsey Solutions is a paid non client promoter of participating pros. Learn more at ramseysolutions. Com smartvestor.