In our society, access to money is a big deal. We want instant access (usually via some form of plastic card) to money. And, in an era where lending standards are making it difficult to take out loans, all sorts of ideas are popping up to help us access — rather quickly — money that may be “ours”, but not as liquid as we’d like it to be. One of these is a 401k debit card that is being offered.
How a 401k debit card works
It’s pretty straightforward. You pay a setup fee and other fees to have a debit card linked to your 401k retirement account. Now, if you are not eligible for non-penalty withdrawal it is fairly obvious what is going on here: You are actually getting a loan against your 401k. I am going to repeat that: The 401k debit card is actually a loan against your retirement account. This means that you have to pay the money back with interest — just as you would when you take out a regular loan against your 401k. The debit card just eliminates the paperwork — and lets you borrow and borrow in a revolving manner as long as there is money in your account.
Why the 401k debit card is a bad idea
First of all, the 401k debit card is a bad idea because you are taking money out of your retirement account. That’s always a bad idea if you are not, in fact, a retiree. It reduces the principal you have in your account, and can severely limit how much money you earn over time for retirement.
Another issue is that payments are made by the employee, through monthly statements. In a traditional 401k loan, payments can be made through payroll — ensuring that you are making payments and avoiding early withdrawal penalties. With the 401k debit card, no such protection is made. If you you miss payments on your card, you could default on your 401k loan, and that means you will have to pay the early withdrawal penalties, further decimating your retirement savings.
Bottom line: A 401k debit card really is no such thing. Perhaps it should be referred to as the “401k secured credit card.” Unfortunately, it is yet another way for Americans to trade their future financial security for instant gratification.
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Bad idea… and as it was rightly pointed out, even the term ‘debit card’ is misleading.
Two sides to most arguments, not this one. The 401(k) debit card is a terrible idea, period.
People should be wary when signing up for debit cards like this. Although it offers more flexibility and ease of use, it also increases the probability of impulse spending.
Never ever take a loan from your 401k..