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 vocal advocate for living debt-free, recently addressed the financial concerns of Aaron from Richmond, Virginia, during a call on his show. Aaron and his wife, currently focused on Ramsey’s Baby Step two — paying off all debt — faced a dilemma about pausing their 401(k) contributions due to an unexpected tax bill.

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

In response, Ramsey shared his perspective on prioritizing debt elimination over the benefits of tax deferral or employer matches in retirement accounts. He pointed out 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 giving up the employer match. 

"The power of focus supersedes a little bit of tax savings and missing out on a little bit of match for a short period of time," Ramsey explained. He highlighted the necessity of shifting one’s lifestyle rather than merely adjusting for minor tax benefits. "You’ve got cars you can’t afford; you’ve been living a life you can’t afford," he noted, stressing the importance of confronting the real issues rather than getting distracted by small financial perks.

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Ramsey also pointed out that it's ineffective to focus on minor tax savings when the high debt payments continuously drain financial resources. "If you say you care about the $2,000 saved in taxes, then why don’t you care about the $2,000 that you’re losing on interest on your student loans, your cars, and your credit cards?" Ramsey challenged.

Ultimately, Ramsey’s stern advice was about more than just numbers; it was about a fundamental change in how individuals view and handle their finances. "It’s not a math problem; it’s a me problem," he concluded, emphasizing that the root of financial issues often lies in personal behavior and lifestyle choices rather than mere numerical errors.

According to finance experts, there is a consensus on the importance of not passing up your employer's 401(k) match, even when juggling high-interest debt. NerdWallet explains that the reasoning is pretty straightforward: the returns from a 401(k) match, often between 50-100%, typically outpace the interest rates on most debts. This suggests it’s a smart move to contribute enough to snag that full match before zeroing in on knocking out high-interest debts.

Similarly, the team at 20SomethingFinance recommends taking advantage of the employer 401(k) match unless faced with 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 hard to beat elsewhere in financial planning. They suggest a practical approach where if the debt interest rate is below a specific percentage — like 5% in a low-interest environment — it’s more advantageous to continue investing in your retirement while maintaining regular payments on the lower-interest debts.

Both perspectives emphasize the benefits of leveraging employer matches as part of a balanced financial strategy, suggesting that sometimes the immediate financial return from these matches can outweigh the benefits of paying down debt more quickly.

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