Avoid 401K Debit Cards Like The Plague!

March 3rd, 2008 | Posted in Credit, Hot Topics, Money Issues, Retirement | Comments Off

If I were to put a one word subtitle on this it would be TANSTAAFL (There Aint No Such Thing As A Free Lunch) or perhaps It’d be a good idea to quote P.T. Barnum’s famous line about the birth rate of suckers.

I’m talking about a plan that’s been talked about on GMA and other places in the last few days. I find myself in total agreement with “401k Debit Cards? What Will They Think Of Next?” in that this entire concept is a dangerous one

So, what is the 401K debit card is all about? Say you’ve been doing ok for a while and you’ve built up a decent sum in your 401K retirement plan. Then along comes some kind of financial trouble and you’re strapped for cash. There is a company that’s making it possible to get a debit card that allows you to spend money out of your retirement fund.

Essentially you’re borrowing money from yourself, which you have to pay back or it’ll hurt your retirement plans. The lenders and such all make money on the deal because they’re charging processing fees both ways. Lenders are going to really love this idea because it allows them to lend you your own money which means that they assume zero risk.

The big problem comes when you start counting the costs involved. If you borrow against your retirement plan, then more than likely while you’re paying it back you are not contributing nearly what you could be (if anything) to your retirement fund. This card also makes it entirely too easy to use up your retirement funds because it’s just a debit card and it’s too easy to overuse it and find yourself without any retirement funds at all.

Then there’s a real kicker… this whole thing is built on the premise that you’re going to be in the same job the whole time. If you lose your job for whatever reason (or just change jobs depending on the details of your 401K plan), then all of the money that you’ve pulled out of the 401K plan becomes due in full right then and there.

There are times when something like this can be considered a good way to do something, but only if it’s an absolute emergency and you do it in a single lump sum to cover some unexpected catastrophic debt situation. The thing to remember here is that you’re borrowing your own financial future and you need to set the bar VERY high. This sort of thing should be absolutely a last ditch effort.

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