Dave Ramsey Says Paying Off Your House With a 401(k) Is a Huge Mistake

"But as Dave Ramsey explained, taking money out of a 401(k) early can be a costly mistake. Any amount withdrawn is subject to income tax, plus a 10% early withdrawal penalty if you're under 59½. Ramsey told the caller that between taxes and penalties, she'd lose roughly 40% of her withdrawal right away. His blunt response: "That would be stupid.""

"He also reminded her that since she was already in debt, draining her retirement account to buy a house would only make things worse. Instead, he advised her to stay in her rental or find a cheaper one, and focus on paying off debt while protecting her retirement savings. "You don't need to be cleaning out your 401(k) and adding to the stupid sauce," Ramsey said."

A caller considered cashing out a 401(k) to pay credit card debt and make a down payment; such a withdrawal is subject to income tax and a 10% early withdrawal penalty if under 59½, often reducing distributions by roughly 40%. Draining retirement savings while already in debt typically worsens financial position. Suggested alternatives include staying in a rental or finding cheaper housing and focusing on paying off debt while protecting retirement accounts. State taxes can further increase the total cost of early withdrawals.

Read at 24/7 Wall St.