401K Debit Card
So, what exactly is the 401K Debit Card program? Well, it is just what it sounds like – a debit card that is tied into your 401k account.
The 401K Debit Card allows you to open a line of credit against the amount available in your 401K account. This will allow you to borrow against loan provisions of your 401K account. Yep, you can go shopping for that big screen HDTV and instead of using a credit card or money you have in the bank, you can swipe your 401K debit card and use those funds.
The 401K debit cards will allow a cardholder to take out a loan from your employer-sponsored 401(k) retirement account. Usually restrictions on the 401K account funds discourage account holders from making withdrawals before they are 59½ years old.
So, are you thinking about getting a 401K debit card? With a traditional 401k loan, the repayment starts automatically to repay the loan through payroll deduction. This is if you take an actual loan from your 401K account. So as long as you’re still working you’re guaranteed to make the payments.
With the 401k debit card, this is not the case. With the 401K debit card, the employee is actually billed each month just like another credit card. So it is actually possible for someone to miss payments and ultimately default on the loan, even while working for the same company! This could result in substantial taxes and penalties for an early withdrawal.
Early withdrawals from 401(k) plans come with taxes and fees, which could deprive account holders of their nest eggs if they fail to replace the money promptly.
So what are the problems with 401K debit cards?
The first and most obvious problem with the 401K debit card is the ease of accessing your retirement funds. Traditionally, to take a loan against your 401k retirement plan, you had to either fill out a form or call your plan provider to request the loan. Then, it may take a week or more to actually receive the money.
With the 401k debit card, you can simply carry the 401k debit card in your wallet or purse and swipe it whenever you want to make a purchase.
“For every $10 you take out of the account, you only have $6 or $7 to spend, probably closer to $6, which means you’re giving up a third of your money,” said Stuart Ritter, certified financial planner for T. Rowe Price, a Baltimore asset-management company. “You’re also giving up money to spend in retirement, so you are by definition lowering your lifestyle in retirement.”
The second problem comes from the way the repayment is handled. With direct monthly statements to you, if you are having to borrow from your retirement plan in the first place, it is probably because you don’t have the money available elsewhere. If that is the case, is it really likely that you are are going to have the money to make the monthly payments? At least with a traditional loan the payments are withheld through payroll, so they have no choice but to make the payments.
Let’s take a look at some simple math on what a 401k debit card will actually cost in you in terms of your retirement savings.
An individual with $20,000 saved in a 401(k) account who contributes $100 every month, assuming an average annual return of 8 percent, would have almost $364,000 saved for retirement in 30 years.
However, the same individual who borrows $10,000 from the plan pays the loan back over five years and stops contributing to the plan while paying back the loan. That same individual would have just $203,000 — a difference of about $161,000.
An easy rule of thumb to remember: Every $1,000 you withdrawal from your 401(k) plan equals about $10,000 less in retirement income.
Still ready to get that 401K debit card now?
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401kinfo4u.com is here to answer the simple questions that you may have about your 401k.
If you are new to a 401k, looking into getting a 401k, or just curious about how it might fit into your retirement package, then you have come to the right place.
thanks for the great information…i was about ready to get one of these.
thanks for that tidbit of information. im still a young man and anytime i feel like chucking caution to the wind telling myself you only live once and when you die you cant take it with you,im reminded that i’lle be old some day. that would be tragic to waste money now that i could use when i retire…. i get the message save more now for big spending later. il’le just be a cool old dude whose pockets got the mumps