Charlotte man says ex wants him to cash out his 401(k) for a home, but Ramsey Show says she’s ‘full of crap’

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Why early withdrawals hurt your wealth

Withdraw money from your 401(k) before the age of 59 1/2 and you’ll pay your normal income tax rate plus a 10% early withdrawal penalty (4). That often means losing 30% to 40% of what you take out. That’s why Ramsey compared to taking out a 35% mortgage.

Because of these penalties, financial experts say early withdrawals should be a last resort. They’re usually recommended only when someone has no other assets to tap and cannot qualify for a lower-interest personal loan or line of credit.

There are a few situations where you can withdraw from a 401(k) without paying the penalty, including certain hardship withdrawals for medical bills or emergency home repairs, but the rules are strict and you still owe income tax. Some 401(k) plans don’t allow early withdrawals at all.

There’s also the “Rule of 55,” which applies to workers who leave their jobs in the year they turn 55 or later. It lets them withdraw from the 401(k) tied to their most recent employer without the 10% penalty, though the money is still taxed.

The long-term cost of withdrawing early is also significant. Ryan’s $85,000 might seem small now, but if he keeps contributing 5% of his salary while his employer matches 5% and the account grows at 8% annually, he could have about $655,847 by age 65 (5). A real estate investment is unlikely to deliver that kind of return in the same period, especially if he’s taking a mortgage to do it.

Better ways to invest

Even if Ryan can’t afford to buy a home right now, there are ways to prepare without draining his nest egg. Financial expert Benjamin Felix of PWL Capital recommends the 5% Rule (6).

Take the price of the home, multiply it by 5%, then divide by 12. That number represents the monthly cost of homeownership, including maintenance and property taxes. If you have a 20% down payment and can afford that monthly amount, you may be ready to buy. If not, it may be smarter to wait.

While buying a property once felt like a guaranteed path to wealth, especially for baby boomers, high home prices today mean buyers need to take a more measured approach. Wilkinson Wealth Management recommends a life-centered financial plan that balances a budget with room for hobbies, vacations and social activities while still working toward long-term goals like retirement savings (7).

Get-rich-quick advice from friends or family can sound tempting, but real wealth building is a slow and steady process. Stick with it, and you’ll be able to live well in your golden years.

“Be careful who you’re listening to for money advice. What you want to do is look at people who are understated,” Ramsey said. “They’re driving a Toyota, they don’t have any flash or bling, and their lives are solid, steady, predictable, sustainable, and happy, with high-quality relationships.”