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In my last post, I introduced us to 401(k) debit cards. While most of what I had to share was negative, there are some positives to these cards. Today, we take a look at the pros and cons of the 401(k) debit card.
PROS
You can use the funds for any purpose and you don't have to explain why you need it, or how you intend to spend it. You can't do this with a regular loan.
You may be able to borrow at a lower rate from your 401(k) plan than you could from a bank.
Since you're borrowing your own money, there's no credit check, and you don't have to worry about creditors coming after you if you fail to repay it.
Part of the interest you pay goes back into your 401(k) account, rather than all of it going to a 3rd party lender.
CONS
If you lose your job some employers may require you to pay the outstanding balance within a certain time frame. Others may let you continue making monthly payments as before. You should check with your employer to find out their policy on this before you sign up for a 401(k) debit card.
Repayments to your loans are made with after-tax dollars. This means you will get double-taxed, which wouldn't happen with a conventional loan.
The fees you pay on a 401(k) loan could be higher than a conventional loan, especially after transaction and maintenance fees.
The interest is never deductible.
Those who opt for the card to meet a cash crunch may have a hard time repaying the loan, and still contributing to their 401(k). This means no company match, and your retirement savings growing much more slowly.
My Conclusion
Make this your last resort. It should only be done in emergency situations. Also make sure you realize the consequences of doing this. You could be looking at a much smaller nest egg, or a potential loan default. Remember, that each time you choose to use the 401(k) debit card, your retirement savings dwindle.
PROS
You can use the funds for any purpose and you don't have to explain why you need it, or how you intend to spend it. You can't do this with a regular loan.
You may be able to borrow at a lower rate from your 401(k) plan than you could from a bank.
Since you're borrowing your own money, there's no credit check, and you don't have to worry about creditors coming after you if you fail to repay it.
Part of the interest you pay goes back into your 401(k) account, rather than all of it going to a 3rd party lender.
CONS
If you lose your job some employers may require you to pay the outstanding balance within a certain time frame. Others may let you continue making monthly payments as before. You should check with your employer to find out their policy on this before you sign up for a 401(k) debit card.
Repayments to your loans are made with after-tax dollars. This means you will get double-taxed, which wouldn't happen with a conventional loan.
The fees you pay on a 401(k) loan could be higher than a conventional loan, especially after transaction and maintenance fees.
The interest is never deductible.
Those who opt for the card to meet a cash crunch may have a hard time repaying the loan, and still contributing to their 401(k). This means no company match, and your retirement savings growing much more slowly.
My Conclusion
Make this your last resort. It should only be done in emergency situations. Also make sure you realize the consequences of doing this. You could be looking at a much smaller nest egg, or a potential loan default. Remember, that each time you choose to use the 401(k) debit card, your retirement savings dwindle.
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