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

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.

"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 Any amount withdrawn is subject to income tax, plus a 10% early withdrawal penalty if you're under 59½.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."

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