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If you've been reading my blog for very long you know that I've never had a credit card, and don't plan on getting one. However, I absolutely love my debit card. How did we ever get by without them? A debit card allows you to make purchases with the card, and the money is automatically deducted from your bank account. It's just like writing a check, only a lot less hassle. Now, they've come out with the 401(k) debit card. It allows you to borrow from your retirement savings, and more and more companies are offering it.
Don't be fooled by the name. While it's called the 401(k) debit card, it actually works like a credit card and debit card rolled into one. It works like a debit card because it lets you access and spend your own money. It works like a credit card because you repay the money over time with added interest and fees. So, lets see you're basically paying someone else interest for borrowing your own money. This isn't sounding very good.
When you use a 401(k) debit card, you are borrowing from your 401(k) account. The amount you borrow has to be approved by your employer. Then, once it's approved, the money is put into a separate money market account which earns dividends. This sounds pretty good, you're earning money on the money you borrow. However, not as much as you'd be earning if you're money had remained in the 401(k). Over the last 80 years or so, the stock market earned on average around 10%, while money market funds earned less than 4%.
You are billed each month for what you've spent, plus interest and fees. Interest rates are generally tied to the "prime rate" as with traditional credit cards. The 401(k) debit card also carries an additional charge based on the amount of money you borrow, that is paid to the debit card vendor. This just keeps getting better. A minimum payment is due each billing cycle and finance charges are accrued until the entire amount is paid back. If you fail to make a payment for three consecutive months, your loan will be in default and considered a 401(k) distribution. This means, unless your 59 1/2 or older, you'll have to pay taxes on your loan balance, plus a 10% penalty.
Despite all of this, there are some advantages of a 401(k) debit card. We'll look at the pros and cons in my next post.
Don't be fooled by the name. While it's called the 401(k) debit card, it actually works like a credit card and debit card rolled into one. It works like a debit card because it lets you access and spend your own money. It works like a credit card because you repay the money over time with added interest and fees. So, lets see you're basically paying someone else interest for borrowing your own money. This isn't sounding very good.
When you use a 401(k) debit card, you are borrowing from your 401(k) account. The amount you borrow has to be approved by your employer. Then, once it's approved, the money is put into a separate money market account which earns dividends. This sounds pretty good, you're earning money on the money you borrow. However, not as much as you'd be earning if you're money had remained in the 401(k). Over the last 80 years or so, the stock market earned on average around 10%, while money market funds earned less than 4%.
You are billed each month for what you've spent, plus interest and fees. Interest rates are generally tied to the "prime rate" as with traditional credit cards. The 401(k) debit card also carries an additional charge based on the amount of money you borrow, that is paid to the debit card vendor. This just keeps getting better. A minimum payment is due each billing cycle and finance charges are accrued until the entire amount is paid back. If you fail to make a payment for three consecutive months, your loan will be in default and considered a 401(k) distribution. This means, unless your 59 1/2 or older, you'll have to pay taxes on your loan balance, plus a 10% penalty.
Despite all of this, there are some advantages of a 401(k) debit card. We'll look at the pros and cons in my next post.
1 comments:
Bad news...don't ever get a card like that!!!
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