Dave Ramsey: 5 Investment Options For High-Income Earners
Written by
Yaël Bizouati-Kennedy
Edited by
Maria Concepcion
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Personal finance expert and host Dave Ramsey typically recommends that households invest 15% of their household income in retirement to save money and build wealth — and as part of his Dave Ramsey’s 7 Baby Steps financial plan.
“When it comes to saving for retirement, you’re the CEO of You, Incorporated — it’s up to you to take charge! And if you practice what we preach, taking charge means you’re investing 15% of your income in tax-favored retirement accounts — like 401(k)s and IRAs,” according to a Ramsey Solutions article.
Now, when it comes to high-income earners, however, Ramsey said that if you make a lot of money, “maxing out those tax-favored accounts won’t come close to hitting that 15% mark.”
So, what are the options for this cohort?
Backdoor Roth IRA
According to Ramsey, as there’s an income restriction on Roth IRAs, typically, high-income earners can’t open one.
“But there’s a way around the rule book — and it’s perfectly legal,” he said. “The federal government says you can convert a traditional IRA into a Roth IRA regardless of your income.”
Ramsey also added that some pros of investing in a backdoor Roth IRA include the fact that when you convert your traditional IRA to a Roth IRA, you pay the taxes upfront and enjoy tax-free growth and withdrawals — that is, once you reach age 59 ½.
Health Savings Account (HSA)
An HSA is both a savings and investment account that can give you three tax breaks, according to Ramsey, who deemed them “a hidden gem of investing.”
“In the short term, an HSA acts as a tax-advantaged emergency fund for health care expenses. You can use the money you save in your HSA to pay for doctor visits, prescriptions and a whole bunch of other medical bills,” he said.
Now, in the long term, he said, you can use your HSA as a “health IRA.”
“Because not only can you save money in your HSA, you can also invest the money in your HSA. Once you’ve contributed a certain amount (usually between $1,000-2,000), you can start investing that money into mutual funds inside the HSA,” he said.
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After-Tax 401(k) Contributions
In 2024, the maximum amount you can contribute to a traditional 401(k) with pretax dollars is $23,000 and $30,500 for those age 50 and older.
“But some employers also allow you to make after-tax contributions once you’ve reached the pretax limit,” he said, adding that if that’s what you want to do, in 2024, you can contribute a maximum of $69,000 of both pretax and after-tax dollars -or $76,500 if you’re 50 or older.
In turn, when you retire, you can take after-tax 401(k) money and put it in a Roth IRA where you can continue to grow wealth.
Brokerage Accounts
These are also called taxable investment accounts. According to him, while you won’t get a tax break, they are more beneficial than letting your money sit in a savings or checking account.
Additional advantages are that there are no contribution limits and they are flexible.
“This flexibility is important if you want to retire early and need an income stream,” he said.
Real Estate
While real estate investments can be very profitable, Ramsey noted that you should first pay off your home before investing.
He also added that it’s the most time-consuming of your investing options.
“So don’t dive headfirst into real estate unless you have a real passion for it. Before you buy, do your homework. Talk to people who’ve done it. They’ll tell you what it’s really like,” he said. “Do the math to see how much money you’d actually make after expenses, including taxes, utilities and other costs. And never, ever borrow money to buy real estate. Only buy investment properties when you can pay cash for them.”
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