![\"Money](\"https:\/\/dmjzpe3a34ghz.cloudfront.net\/ace3a866-cda7-4781-8243-733051c826ec.jpg\")
\nMoney Expert Dave Ramsey Celebrates 25 Years On The Radio During A SiriusXM Town Hall (Image source: Getty Images \/ Photo by Anna Webber)<\/p>\n
A 401(k) is an employer-sponsored retirement savings plan that allows workers to save and invest a portion of their income on a tax-deferred basis. The contributions to the plan are deducted automatically from the paycheck and invested in options chosen by the employees. The plan holders can also match the employer’s contributions to add to the savings. Ramsey explained\u00a0in his blog<\/a> that contributions made to a traditional 401(k) reduce taxable income as they are not subject to income tax. He added that it is important to note that an IRA is not an investment itself. \u201cIt\u2019s the account that holds your investments and determines how they\u2019re taxed by the government,\u201d he wrote. This is because the withdrawals from a traditional 401(k) in retirement are treated as ordinary income, and taxes are owed on the withdrawal amounts. \u201cYou get the tax break now, but you\u2019ll have to pay the tax man somewhere down the line,\u201d Ramsey wrote, adding that taking a Roth 401(k) plan would be more beneficial to enjoy tax-free withdrawals as well.<\/p>\n Ramsey explained that a Roth 401(k) is funded with after-tax dollars, meaning contributions are taxed before they enter the account. Thus, unlike traditional 401(k), the contributions do not reduce taxable income, but the withdrawals ultimately qualify as tax-free earnings. \u201cBoth types of tax advantages are great, but if your employer offers a Roth 401(k), we always recommend taking that option. Allowing your money to grow tax-free for decades and then not having to worry about taxes when you\u2019re living out your retirement dreams? Sign us up!\u201d Ramsey wrote.<\/p>\n According to Ramsey, a 401(k) account may look like a great investment, but it isn’t that easy. According to the IRS, contributors can’t withdraw funds until they cross the age of 59, without incurring a 10% penalty and paying taxes. “But there is a loophole: 401(k) loans allow you to use your retirement savings without paying penalties or taxes as long as you pay the money back. Of course, doing this comes with a bunch of rules, and things can go really wrong, really fast,” he wrote.<\/p>\n In\u00a0a separate blog<\/a>, Ramsey explained that for people with mounting debt, it is best to pause their 401(k) contributions until they clear their dues. Emphasizing stability before growth, he laid out a seven-step plan in which paying off debt aggressively and building an emergency fund come before investing in a retirement account. However, experts told NASDAQ that this idea may not be suitable for everyone.<\/p>\n More on Market Realist:<\/p>\n Finance expert Dave Ramsey has a warning for Americans who rely on Social Security<\/a><\/p>\n![\"Representative](\"https:\/\/dmjzpe3a34ghz.cloudfront.net\/ccdc739c-6317-42fb-ad62-a889b010f60f.jpg\")
\nRepresentative illustration (Image source: Getty Images\/Photo by Douglas Sacha)<\/p>\n![\"Representative](\"https:\/\/dmjzpe3a34ghz.cloudfront.net\/f52bc361-5b8e-442d-a5ff-d69372cb01b2.jpg\")
\nRepresentative image of a senior woman worried about finances (Image source: Getty Images\/Stock photo by Halfpoint images)<\/p>\n