Financial Expert Warns Against Raiding Retirement Funds for Car Debt, Urges Calculated Approach

Why Dipping Into Your 401(k) for Debt Relief Is a Costly Mistake

AUSTIN, Texas – For many Americans, a car loan is a necessary burden. But for Preston, a 29-year-old expecting his first child, the $8,000 balance felt like a looming crisis. In a recent call to The Ramsey Show, he asked hosts Dave Ramsey and John Delony if using his 401(k) to wipe out the debt before the baby arrives was a viable option. The answer was a swift and unequivocal no.

"One hundred percent a terrible idea. Don't do this," co-host John Delony stated in the January 17 segment. Ramsey concurred, framing the move as financially disastrous. The reasoning is clear-cut: early withdrawals from a 401(k) before age 59½ typically incur a 10% penalty, and the distributed amount is taxed as ordinary income. For someone in a moderate tax bracket, this can mean forfeiting nearly a third of the withdrawal upfront.

Preston's panic is understandable, yet far from unique. He and his wife each earn around $58,500 annually, but with a total debt of $23,000 and his wife planning to shift to part-time work post-birth, the financial pressure is mounting. He is part of a national trend where auto debt has ballooned. According to the Federal Reserve Bank of New York, U.S. auto loan debt reached $1.66 trillion in Q3 2025, making it the largest category of non-housing consumer debt.

Compounding the issue, the cost of car ownership has surged. Edmunds data shows the average monthly payment for a new vehicle hit a record $772 in Q4 2025, with the average amount financed soaring to $43,759. This squeeze is leading some to eye their retirement savings as an emergency fund—a move experts warn jeopardizes long-term security for short-term relief.

"If you're in a 20% tax bracket with a 10% penalty, that's 30%," Ramsey told Preston, equating the withdrawal to taking a loan at a 30% interest rate to pay off the car. Beyond the immediate cost, he stressed the irreversible loss of compound growth on the withdrawn funds—growth that could have doubled a $10,000 investment in a decade at a conservative 7% annual return.

Separating Fear from Finance

Ramsey emphasized that anxiety often stems from the unknown. "When you actually know in detail what the villain looks like, he's not nearly as scary," he said. The prescription for Preston and his wife was a detailed budget and a math-based plan, not an emotional reaction. This might involve Preston taking on a side job temporarily or the couple reevaluating their post-birth work arrangements based on cold, hard numbers.

For those struggling with car payments, alternatives exist, such as refinancing the loan or, in extreme cases, selling the vehicle if its value exceeds the loan balance. The core message from financial advisors is consistent: retirement accounts should be a last resort, not a pressure-release valve for depreciating assets.

Reader Reactions: A Mix of Empathy and Frustration

We asked several readers for their take on the story:

• Michael R., Financial Planner, Chicago: "Ramsey's advice is spot-on. The math never lies. Raiding a 401(k) is a wealth transfer from your future self to your current creditors, with the government taking a hefty cut. It's a lose-lose."
• Sarah L., New Mother, Denver: "My heart goes out to Preston. That pre-baby anxiety is so real. But we found that creating a strict, written budget was the only thing that calmed our nerves. The numbers either work or they don't."
• David K., Small Business Owner, Tampa: "This is the result of a culture that normalizes massive debt for everything. $43,759 for a car? That's insanity. People need to buy used and within their means instead of looking for magical solutions that sabotage their future."
• Lisa M., Recent Graduate, Boston: "It's easy for experts to say 'just budget better,' but when you're staring at bills and a life change, logic goes out the window. We need more accessible, low-cost financial coaching for young families."

Sources: The Ramsey Show; Federal Reserve Bank of New York; Edmunds.

This article is for informational purposes only and does not constitute financial advice.