"However, as much as I like the tax-favored status of 401(k) plans and IRAs, I need to tell you something heretical, something almost nobody else will come out and say: Most company 401(k) plans stink," he said.
"They have high management fees and administrative costs that eat into your returns, and worst of all, they typically offer you lousy choices for your investments and not nearly enough control over them," Cramer added. "The 401(k) business is a racket for the managers who get to charge you these fees.
"Sometimes it feels like the whole 401(k) system was set up to benefit the financial services industry, not you. And given the way Washington works I wouldn't be surprised if that was actually the case."
Nevertheless, Cramer added, contributing to a 401(k) is still too good to pass up for its tax-blessed nature.
"Plus, many employers will match your 401(k) contributions, and I'm a big believer in not turning down free money," he said.
Cramer suggested funding a 401(k) until the company match limit is reached, and then stopping.
After that, he said, "the rest of your retirement investing should happen in your IRA until you hit the upper limit on what you're allowed to contribute in a given year."
IRAs provide much more freedom.
Cramer suggested picking high-yielding dividend stocks that provide protection and generate income.
"But there are a couple of wrinkles that make investing in an IRA different from investing in a regular account," he added.
Cramer suggests being wary of master limited partnerships in an IRA because they're already tax-advantaged.
Their distributions are considered a return of capital, and an arcane tax rule could mean losing tax benefits by owning too many MLPs.
"The goal here is to be able to reinvest your dividends and let them compound year after year after year without paying any taxes until you withdraw your money at the very end, a terrific recipe for producing huge long-term returns."
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