Dave Ramsey Tells Caller To Stop Funding His 401(k) With A 6% Employer Match While In Debt — Experts Disagree With This Controversial Advice

Dave Ramsey, a strong advocate for living debt-free, recently had a conversation with Aaron from Richmond, Virginia, about his financial concerns on his show. Aaron and his wife are currently focused on Ramsey’s Baby Step two, which involves paying off all debt, but they were unsure whether to pause their 401(k) contributions due to an unexpected tax bill.

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With a household income of $131,000 and an annual contribution of $6,000 to their 401(k), including a 6% employer match, Aaron was concerned about the increased tax liability and missing out on potential retirement savings.

In response, Ramsey advised prioritizing debt elimination over the benefits of tax deferral or employer matches in retirement accounts. He emphasized that with $120,000 in total debt, including $12,000 on credit cards, $50,000 in student loans, and $16,000 in vehicle loans, Aaron should focus on clearing these debts before maximizing retirement contributions, even if it means forgoing the employer match.

“The power of focus is more important than a little tax savings and missing out on a bit of match for a short period of time,” Ramsey explained. He stressed the need to adjust one’s lifestyle rather than just focusing on minor tax benefits. “You’ve been living beyond your means,” he pointed out, highlighting the importance of addressing the root issues rather than getting distracted by small financial advantages.

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Ramsey also argued that concentrating on minor tax savings while making high debt payments continuously drains financial resources. “If you care about saving $2,000 in taxes, why don’t you care about the $2,000 you’re losing on interest on your loans?” Ramsey challenged.

Ultimately, Ramsey’s firm advice was not just about numbers but about making a fundamental change in how individuals approach their finances. “It’s not a math problem; it’s a me problem,” he concluded, emphasizing that personal behavior and lifestyle choices often underlie financial issues.

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According to finance experts, there is a consensus on the importance of not passing up on your employer’s 401(k) match, even when dealing with high-interest debt. NerdWallet explains that the returns from a 401(k) match, often between 50-100%, typically outweigh the interest rates on most debts. This suggests that it’s wise to contribute enough to receive that full match before focusing on paying off high-interest debts.

Similarly, the team at 20SomethingFinance recommends taking advantage of the employer 401(k) match unless facing extremely high debt interest rates, such as those from payday loans. They describe the 401(k) match as a guaranteed return on investment — a benefit that’s hard to beat in financial planning. They propose a practical approach where, if the debt interest rate is below a specific percentage, like 5% in a low-interest environment, it’s more beneficial to continue investing in your retirement while making regular payments on the lower-interest debts.

Both perspectives highlight the advantages of leveraging employer matches as part of a well-rounded financial strategy, suggesting that sometimes the immediate financial return from these matches can outweigh the benefits of paying off debt more quickly.