Dave Ramsey Said There Are Only 2 Situations Where You Should Borrow From Your 401(k). Is He Right?

Don't borrow from your 401(k) without reading this.

A 401(k) is one of the best ways to save for retirement if you are offered this account by your employer. While you don't get to choose your brokerage firm like with an IRA, you get benefits such as having your contributions withdrawn directly from your paycheck. And many companies offer an employer match, which means your employer deposits money to match some of the contributions you make.

Another potential benefit of a 401(k) is that often, you are able to borrow from your retirement account without penalty if you need the money.

But while 401(k) loans are available, finance guru Dave Ramsey warns against taking advantage of them. In fact, Ramsey has explained there are only two situations where borrowing against a 401(k) could make sense. Here's what they are.

Ramsey said these are the only circumstances when you should borrow against your 401(k)

According to Ramsey, it is a good idea to borrow from your 401(k) only if you would face very serious financial consequences for not doing so. And he identified two situations when the consequences would be dire enough to justify taking money from your retirement account.

"Unless you’re facing bankruptcy or foreclosure, never ever ever borrow from your 401(k) to pay off your debt," Ramsey warned. "I repeat -- never borrow from your 401(k)! Not only will you get hit with penalties, fees and taxes on your withdrawal, but you’re also stealing from your own future. And I know y’all know better than that!"

Bankruptcy and foreclosure are among the most drastic financial moves you could make. With a bankruptcy, you'd have the remaining balance of your debt wiped out but would have a record of the bankruptcy filing on your credit report for as long as a decade. A foreclosure would also stay on your credit record for a long time, and would also result in losing your house.

Should you listen to Ramsey?

Whether you should listen to Ramsey or not depends on your situation.

First, if you are facing either bankruptcy or foreclosure, it would generally be worth borrowing from a 401(k) if you could avoid these dire consequences permanently by doing so. However, make sure your 401(k) loan isn't just delaying the inevitable.

Your 401(k) is actually protected in a bankruptcy filing, so you wouldn't want to raid the account to pay off some of your debt and then end up having to file for bankruptcy anyway. Likewise, you wouldn't want to drain your retirement funds to avoid foreclosure for a few months if you were just going to end up losing your house anyway because you'd still be unable to pay your mortgage over the long term.

As for other situations, Ramsey is generally correct that you don't want to take money out of your retirement account. While a 401(k) loan doesn't result in penalties if you pay it back on time, there's a risk you could end up with a tax penalty if you can't repay your loan as promised. And you could face fees and the loss of the returns your investment would have earned if you borrow the money from your account.

So, for most people, listening to Ramsey about this issue makes good sense. Don't borrow money from a 401(k) unless you really, truly need it and doing so would help you permanently avoid financial disaster.