Why Do You Recommend a Roth Over a 401(k)?

Summary

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Podcast Summary: Ramsey Everyday Millionaires

Episode: Why Do You Recommend a Roth Over a 401(k)?
Air Date: December 10, 2025
Hosts: Rachel Cruze, Dave Ramsey
Listener Caller: Jay from Atlanta, Georgia

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Episode Overview

This episode dives into a common investing question: Why do the Ramsey experts recommend Roth accounts over traditional 401(k)s? The conversation centers on financial strategy, the benefits of Roth accounts, and practical next steps for someone early in their wealth-building journey. Through listener Jay's story, the hosts explain investing basics, Roth vs. traditional options, and how to prioritize retirement savings after eliminating debt.

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Key Discussion Points & Insights

1. Jay’s Situation: Learning and Investing After Debt

• Jay's Background:

  • Recently switched jobs, previously invested in a 401(k), lost his job and cashed out his account.
  • Suffered penalties and taxes for early withdrawal.
  • Has new job with a 30% 401(k) match.

• Advice on Job Change & 401(k) Rollover:

  • Rachel Cruze (01:01):

    “If you leave a job, you want to roll over your 401(k) just to a traditional IRA. So you're keeping the investments, you're just moving it out of the company's 401(k) versus basically what you did is you just sold it.”

  • Emphasis on avoiding early withdrawals to prevent taxes and penalties.

2. Why Roth Accounts Are Recommended

• Explaining Roth vs. Traditional:

  • Dave Ramsey (02:09):

    “If you have the choice… I would select a Roth option because in that way you're paying the taxes on the money now so that when you go to retire, it's all tax free growth, which is great for you.”

  • Rachel Cruze reinforces the "tax-free growth" advantage, explaining the “little coat” analogy (04:39):

    “If your investment has a Roth around it, that means you have funded those retirement accounts after you've paid taxes on your income… the government has to tax you on that because they did not tax you earlier on your income and then they tax you on all the growth. And if you know anything about compound interest, your investments will grow, grow, grow. So Roth is amazing.”

• Host Recommendation:

  • Favor Roth 401(k) or Roth IRA if available.
  • “Take the match” from employers—especially with generous matching.

3. Prioritizing Financial Steps

• Jay’s Current Finances & Recommendations:

  • Rent: $700/month, Child Support: $400, Student Loan: $120.
  • Debt remaining: $9,700 (down from $22,000).
  • Savings: $2,500 (earmarked for a car).

• Dave Ramsey & Rachel’s Guidance:

  • (04:10) Rachel Cruze:

    “… just pause all retirement and work to throw as much money at this $9,700 that you have left in debt and then start working to bump up that emergency fund.”

  • Don’t invest until all debt (except mortgage) is paid and a 3–6 month emergency fund is in place.

• Investing Once Ready:

  • “Put 15% of your income into retirement” once past the debt and emergency fund stages (04:39 – 05:44).

4. Encouragement & Mindset

• Rachel and Dave repeatedly praised Jay’s progress (03:22 – 03:24):
  • Rachel Cruze:

    “Nice.”

  • Dave Ramsey:

    “Way to go.”

• Affirming the power of persistence:
  • Rachel Cruze (05:44):

    “I'm so glad that you picked up the show and you actually are making progress. You paid off so much debt already, Jay, so just keep at it. You're doing incredible.”

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Notable Quotes & Memorable Moments

• On Roth vs. Traditional (02:09) – Dave Ramsey:

  “If you have the choice...I would select a Roth option because in that way you're paying the taxes on the money now so that when you go to retire, all it's all tax free growth, which is great for you.”

• On Investing Steps (04:10) – Rachel Cruze:

  “Pause all retirement and work to throw as much money at this $9,700 that you have left in debt and then start working to bump up that emergency fund.”

• On Compound Interest & Roth (04:39) – Rachel Cruze:

  “If you know anything about compound interest, your investments will grow, grow, grow. So Roth is amazing.”

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Timestamps for Key Segments

• 00:25–01:26: Jay’s background, previous 401(k) withdrawal
• 01:26–02:09: Roth vs. Traditional explanation
• 02:43–03:10: Jay discusses debt and monthly payments
• 04:05–04:10: Car savings and company vehicle detail
• 04:10–04:39: Rachel’s step-by-step investing roadmap
• 04:39–05:44: Visual analogy and further detail on Roth’s tax treatment, encouragement for Jay

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Summary & Takeaways

• Priority: Focus on debt elimination and emergency funding before starting retirement investing.
• Roth Over Traditional: Always choose Roth accounts for the long-term benefit of tax-free growth, if available.
• Employer Match: Always leverage employer contributions, but avoid early withdrawals and roll over accounts properly.
• Encouragement: Progress is celebrated—small wins accumulate on the path to building wealth.

Listeners new to investing or wondering about retirement strategies will gain a clear, actionable understanding of why Ramsey experts favor Roth accounts, as well as a step-by-step approach to financial planning.

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Transcript

[Dave Ramsey]

Foreign.

[Podcast Announcer]

This episode is brought to you by SmartVestor. Connect with an investing pro near [e-mail].

[Rachel Cruze]

SmartVestor let's go to Jay in Atlanta, Georgia. Hi, Jay. Welcome.

[Caller Jay]

Hey. Hello, Ms. Jade and Ms. Rachel.

[Rachel Cruze]

Well, hello, Mr. Jay. How can we help today?

[Caller Jay]

Yes, I just had a question about investing in Rothschild versus the traditional 401k and only because, like, from my experience.

I invested in a 401k for about a year and it was about like $1200 in there a couple of months ago. But also I had ended up losing my job, so I just went ahead and sold it and I got back half. So I was trying to see what was different.

[Rachel Cruze]

So normally. Yes. Okay. So what we would normally say is if you leave a job, you want to roll over your 401k just to a traditional IRA. So you're keeping the investments, you're just moving it out of the company's 401k versus basically what you did is you just sold it. Yeah. And if it, and if the market was kind of low at the time, you know, you may not have gotten, you know, fully what it was and probably paid some taxes and all of it. So.

[Dave Ramsey]

Yeah, because it was retirement funds.

[Rachel Cruze]

Yes. Yeah. So, yeah, you did get hit hard with some penalties. So our rule of thumb with investing is did your 401k at your previous employer, did it have a match built in?

[Caller Jay]

Yes, it had about a 4% match.

[Rachel Cruze]

4% match. Okay, perfect. Do you have a new job now with a 401k currently?

[Caller Jay]

Yes, I have a new job and they actually match up to 30%.

[Rachel Cruze]

Wow. Okay, perfect.

[Dave Ramsey]

And is this one a Roth? You asked about Roth versus traditional. Is it a Roth 401k on this one?

[Caller Jay]

I think so. I, that's another thing. I'm not really sure the difference in, you know, I just picked one.

[Dave Ramsey]

Yeah. If you have the choice, if there's, if they're telling you you have the choice and I would ask, I would make sure to get with HR and ask that question. I, I would select a Roth option because in that way you're paying the taxes on the money now so that when you go to retire, all it's all tax free growth, which is great for you. So I would always select that. And if not, the traditional is fine and you can, you know, get the match on that. The biggest question is if you're ready to be investing yet at this point. So can you tell us a little bit about like, do you have any debt? Do you own or rent Your house. Tell us about that.

[Caller Jay]

Yes. So I rent right now. My rent is about 700, and other than that, I have child support. That's about 400. That can vary. And then my student loan repayment is about $60 a month. I put a extra 60 with it, so it's about 120.

[Dave Ramsey]

What's the whole. What's the whole lump of debt?

[Caller Jay]

I just. I will. So I found you guys about a year ago, and I paid some stuff off, so I just got about 9.7k left.

[Dave Ramsey]

Okay.

[Caller Jay]

I started at 22.

[Dave Ramsey]

Okay. Way to go.

[Rachel Cruze]

Nice.

[Dave Ramsey]

Anything else? Credit cards or cars?

[Caller Jay]

Oh, yes, my groceries are about 200 and so, yeah, that's it.

[Dave Ramsey]

No credit cards? No car note?

[Caller Jay]

No. I did open up a credit card last year, and then I found you guys a month later and closed it.

[Rachel Cruze]

Do you have any money saved, Jade? Jay?

[Caller Jay]

Yes, I have about 2.5 saved. The only thing is that's earmarked for a car right now. I work for a company, and we get company vehicles, so that comes out of my check. So I'm saving that 2.5 to just get another car right now.

[Dave Ramsey]

Oh, because you've only been driving the company car, right?

Okay.

[Rachel Cruze]

Yeah. So what I would probably do, Jay, is just pause all retirement and work to throw as much money at this $9,700 that you have left in debt and then start working to bump up that emergency funds. You know you have 2,500 in it. I know it's earmarked for a car, but I would just. I would get three months. And you don't have a ton of expenses month to month, which is great. So you could be on the three month side. That could be your baby step three. And then we can start looking at retirement, which will be 15% of your income into retirement. So. So like Jade said at the beginning of the call, the Roth. This is a picture I have. This is my dad's teaching from the old, old fpu. But it's the little coat. Do you remember this? He had, like, different jars. Like, One was a IRA, one was a 401K. And then there's like a little coat that he put over each one. He was like, the coat is the. So if. So. So if your investment has a Roth around it, that means you have funded those retirement accounts after you've paid taxes on your income. So you pay all your taxes, and then after tax, income then goes into those. Now, if it's before tax, then again, that money is coming out before you pay taxes on your income. And because of that, the government has to tax you on that because they did not tax you earlier on your income and then they tax you on all the growth. And if you know anything about compound interest, your investments will grow, grow, grow. So Roth is amazing. Not everyone offers a Roth 401K, but if they offer it like Jade said, take it and open up a Roth IRA and be putting 15% of your income into that. But that won't probably be for another two years, Jay, or a year and a half after you pay off this debt and get a fully funded emergency fund. But I'm so glad that you like you picked up the show and you actually are making progress. You paid off so much debt already Jay, so just keep at it. You're doing incredible.

[Podcast Announcer]

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