401(k) Debit Cards: Worst Idea Ever

I didn’t know until today that 401(k) debit cards even existed, but it’s possibly the most evil personal finance temptation ever.  Anyway, I caution anyone using one unless there are on their deathbed.   Using a 401(k) debit card can yield  tax penalties and increase the risk of depleting of your retirement fund.  The only “pro” is easy access to funds, but there are so many cons that it is scary.  I only want to warn everyone of the risks of taking any money out your 401(k), and caution you of the financial risks.

From FINRA :

  • You’ll have to consider what happens if you lose or leave your job—different employers have different guidelines. For example, some may require you to repay your entire outstanding loan balance within a certain timeframe. If this is within a short time of your departure, you may find yourself in a financial crunch. Other employers may allow you to continue making monthly payments as before. Plan guidelines and your choices will vary from employer to employer. Be sure to check what your employer’s plan guidelines are before you sign up for a 401(k) debit card.
  • Repayments to your 401(k) debit card loans are made with after-tax dollars that will be taxed again when you eventually withdraw them from your account. This is double taxation that would not take place if you took out a conventional loan.
  • Those who opt for a 401(k) debit card to meet a short-term cash crunch may find it difficult to pay back the loan and still continue making contributions to their retirement savings. If your contributions stop, so does your company match—and your account grows much more slowly.
  • Depending on what market conditions are when you are approved for the 401(k) debit card loan, you could be locking in a loss.
  • The fees you pay on the 401(k) loan could be higher than on a conventional loan, depending on the way they are calculated, and especially after transaction and maintenance fees.
  • The interest is never deductible, even if you use the money to buy or renovate your home.
  • If you go on a leave of absence, your employer may agree to suspend your loan repayments. But you’ll have to make up the missed payments when you return—either by increasing the amount of each monthly payment or by paying a lump sum at the end—so that the term of the loan does not exceed five years. This could also put you in a financial crunch.
  • While unused funds in your money market account will continue to accrue dividends, the funds that you have borrowed and not yet repaid will not.
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4 thoughts on “401(k) Debit Cards: Worst Idea Ever

  1. Apparently I’m even more behind the times than you are! ha I didn’t know either that these cards existed. It’s a tough year financially for a lot of us in this country, true. However, somebody providing us with a 401(k) debit card seems almost the same as allowing somebody to sell their soul for $100 or something. It’s sad. I agree with you. I think it’s a bad idea, no matter how bad things get in this economy, to start pilfering away your retirement because of temporary tough times.

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