Dave Ramsey Warns Americans Over This Key 401(k) Blunder

Dave Ramsey, one of the most well-known personal finance experts, says that one of the biggest mistakes Americans make with their 401(k) retirement plans is cashing out or taking an early withdrawal.

Recently, early 401(k) withdrawals hit a record high, largely because the SECURE 2.0 Act made it possible to withdraw $1,000 for an emergency without penalty. 

Here is why a 401(k) withdrawal is a financial mistake, though, along with several other pieces of retirement advice from Dave Ramsey.

401(k) hardship withdrawals are on the rise

According to data from Vanguard, 6% of 401(k) participants took a hardship withdrawal in 2025, an increase from 5% in 2024. While some of these withdrawals may be penalty-free under the SECURE 2.0 Act's $1,000 provision for emergencies, others may withdraw early and pay a penalty.

If you're under age 59 1/2, you're required to pay a 10% penalty on money you withdraw from your 401(k). This amount is then added to your annual income, which can change your tax bracket and lead to tax surprises later on.

The real downside to withdrawing money early

Even though penalties and a potentially higher tax bill are major downsides to withdrawing your 401(k) investments early, the biggest drawback is losing compound interest. Ramsey explains that when you take money out of a 401(k), even if it's a 401(k) loan, your money cannot compound and grow in the market.

If you calculate what the money you took out would be worth 15 to 20 years in the future, it could be a loss of thousands of dollars, according to Ramsey.

Ramsey's tips for paying off debt without using your 401(k)

Many people make 401(k) withdrawals to pay off debt, but Ramsey says to avoid this. Instead, he recommends getting on a budget and following the debt snowball method (where you pay off your debt smallest to largest). 

If you have non-retirement investments, such as money in a brokerage account, Ramsey says you can sell CDs, savings bonds, stocks, gold, and crypto to put towards your debt payments.

The one exception for tapping into your 401(k) early

Even though Dave Ramsey is against withdrawing from your 401(k) or taking out a 401(k) loan, there is one exception. He says that it is okay to tap into your 401(k) early if you are facing foreclosure or bankruptcy. 

He's very specific with his advice that withdrawing from your 401(k) is an absolute last resort after you have tried everything else, including putting your house up for a short sale.

How to maximize your 401(k) through workplace benefits

If you want to grow your 401(k) balance, especially if you're nearing retirement soon, Ramsey recommends taking advantage of workplace benefits, like an employer match. He only recommends that people invest for retirement when they're debt-free. 

However, once people are debt-free, he says to invest in a 401(k) at least up to the match. An employer match is essentially free money that you can add to your retirement portfolio.

If you're not sure whether or not your employer offers a match or how long you need to contribute to be fully vested, ask your Human Resources department for help.

Don't forget about investing in a Roth IRA

Although Ramsey encourages people to invest in their 401(k) enough to get their employer matches, he prefers Roth IRAs. The reason is that you contribute to a Roth IRA with after-tax money, which means that once you're in retirement, you can withdraw it tax-free. 

Because you don't know what your tax bracket will be in retirement, having a Roth IRA can help you keep more of your hard-earned money in your later years. 

Additionally, there are no Required Minimum Distributions (RMDs) with Roth IRAs, so if you have other sources of income in retirement, you can let your money grow as long as you like.

Why Ramsey's message resonates with so many people

Ramsey's popular radio show and best-selling books have resonated with millions of people over the past few decades. 

During uncertain times, it's helpful for many people to have a clear approach to their personal finances. Ramsey offers this with concrete advice and his 7 Baby Steps program. Even though some people disagree with his approach, there are millions more who have had success following his program.

Bottom line

Ultimately, if you want to reach your retirement goals, avoid cashing out your 401(k) or making a hardship withdrawal. That's because once the money leaves your account, it can no longer compound and grow for your future. 

Dave Ramsey encourages his followers to keep their 401(k)s intact (with very limited exceptions) so that they have enough to live on during the retirement years.