Should I Cash Out My 401(k) to Pay Off Debt? Dave Ramsey’s Definitive Answer

Are you staring at a mountain of debt while also having money sitting in your 401(k)? It’s tempting to think about tapping into those retirement funds to get out from under the crushing weight of debt. I mean, who hasn’t daydreamed about being debt-free overnight?

But before you make that call to your retirement plan administrator, let’s talk about what financial expert Dave Ramsey has to say about this strategy – and why it might be what he calls “adding to the stupid sauce.”

Dave Ramsey’s Clear Stance on Using 401(k) Funds for Debt

Dave Ramsey makes this very clear: don’t take money out of your 401(k) to pay off debt. Period.

Someone called Ramsey and asked if she could cash out her 401(k) to pay off her credit card debt and put down payment on a house. Ramsey gave her a blunt answer. He told her that she would lose 20% of any money she took out of her 401(k) right away because of penalties and taxes. He normally speaks straight, so he said, “That would be stupid.” “.

Harsh? Maybe. But he’s trying to protect your financial future.

The Real Cost of Early 401(k) Withdrawals

Let’s break down exactly why using your 401(k) to pay off debt is generally a terrible idea:

1. The Penalty-Tax Double Whammy

When you withdraw money from your 401(k) before age 59½, you get hit with:

• A 10% early withdrawal penalty
• Income tax on the entire withdrawal amount
• Possible state penalties (varies by location)

Finance expert Karla Dennis points out that these combined costs can take a massive chunk out of your withdrawal – potentially 40% or more depending on your tax bracket!

2. Lost Growth Opportunity

Every dollar you remove from your 401(k) isn’t just a dollar lost for retirement. You’re also losing all the potential growth that money could have generated through compound interest.

Think about it: $10,000 withdrawn today could have been worth $30,000 or more at retirement age, depending on market performance and how many years you have until retirement.

3. Jeopardizing Your Future

Your 401(k) has one job: funding your retirement. If you raid it early, you’re stealing from yourself in the future. And trust me, you will be ANGRY about that next time.

When to Use Non-Retirement Investments Instead

While Ramsey is adamant about not touching retirement accounts, he does recommend using non-retirement investments to tackle debt. According to Ramsey Solutions, you should consider cashing out:

• Certificates of deposit (CDs)
• Savings bonds
• Precious metals like gold and silver
• Cryptocurrency
• Single stocks
• Real estate investments (in some cases)
• Any other non-retirement investment accounts

These investments won’t cost you as much as taking money out of a retirement account, and paying off high-interest debt with them often makes the most sense.

The Debt Snowball Method: Dave’s Preferred Approach

Instead of cashing out retirement funds, Dave Ramsey recommends his famous “Debt Snowball” method:

1. List all your debts from smallest to largest (regardless of interest rate)
2. Pay minimum payments on everything except the smallest debt
3. Attack the smallest debt with everything you’ve got
4. Once that’s paid off, roll that payment into the next smallest debt
5. Repeat until debt-free

This method creates psychological wins that keep you motivated. Plus, it doesn’t rob your future retirement security.

What About Using 401(k) to Pay Off a Mortgage?

Some homeowners wonder if using 401(k) funds to pay off a mortgage might be different from other debts. Nope – Ramsey still says no.

In one instance covered by 24/7 Wall St., Ramsey told someone to “think twice if you ever think that using your 401(k) money to pay off your home is a good idea.”

Another caller mentioned by Rich Duprey asked about using 401(k) money to pay off a mortgage, and Ramsey maintained his position: while he “wants you to pay off your mortgage as bad as anyone in the United States,” he doesn’t recommend using retirement funds to do it.

The Only Exceptions to the Rule

Are there ANY situations where Ramsey might green-light tapping retirement accounts? Yes, but they’re extreme:

• To avoid bankruptcy
• To prevent foreclosure on your home

Outside of these dire circumstances, the answer is a firm no.

What Should You Do Instead?

If you’re struggling with debt but have money in a 401(k), here’s what Dave recommends:

1. Temporarily pause retirement contributions – Stop contributing to retirement accounts while you’re paying off debt (but don’t withdraw what’s already there!)

2. Follow the Baby Steps – Work through Dave’s Baby Steps, starting with a $1,000 emergency fund, then the debt snowball

3. Get “gazelle intense” – Cut expenses drastically, pick up extra work, sell stuff you don’t need

4. Consider non-retirement investments – If you have them, cash these out to accelerate debt payoff

5. Join Financial Peace University – Get the education and community support to stay motivated

What About That High-Interest Debt Though?

I know what you’re thinking – “But my credit card charges 24% interest! My 401(k) only grows at maybe 8-10% in a good year. The math works out!”

While that seems logical, it ignores several factors:

• The immediate tax/penalty hit (up to 40%)
• The long-term compound growth you’re giving up
• The behavioral habits that might lead you back into debt

Dave Ramsey often says personal finance is 80% behavior and 20% knowledge. If you don’t fix the underlying behaviors that created the debt, you might end up with empty retirement accounts AND new debt.

Real Talk: Being Debt-Free AND Retirement-Ready

We all want the freedom that comes with being debt-free. But as one caller to Ramsey’s show found out, making $170,000 a year doesn’t matter if you’re drowning in payments. Dave called this caller “broke” despite their high income because of their debt burden.

The good news? You can become debt-free WITHOUT sacrificing your retirement security. It might take longer and require more sacrifice in the short term, but your future self will thank you.

Final Thoughts: Short-Term Pain for Long-Term Gain

Getting out of debt is hard work. There’s no magic bullet or easy button. Cashing out your 401(k) might seem like a quick fix, but it creates more problems than it solves.

As Dave would say, “Live like no one else now, so later you can live and give like no one else.”

That means embracing the temporary discomfort of attacking your debt with current income and non-retirement assets, while leaving your retirement funds untouched to grow for your future.

Have you been tempted to use retirement money to pay off debt? What strategies have worked for you in tackling debt? Drop a comment below – I’d love to hear your experiences!

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Disclaimer: This article reflects the financial philosophy of Dave Ramsey and his organization. Everyone’s financial situation is unique, and it’s always advisable to consult with a financial professional before making significant financial decisions.