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The Online Advisor

September 2008

Smart Business

 401(k) debit cards: Weigh the pros and cons


If your employer's 401(k) plan offers the 401(k) debit card feature, don't sign up without a serious look at what you're getting into.

A 401(k) debit card allows you to borrow up to $50,000 or 50% of your plan account, whichever is less, via a debit card. Every time you use the card, you are withdrawing money from your 401(k) savings. You must repay the money along with fees and interest.

Using a 401(k) debit card may sound like a good deal when you need money. It's relatively easy, and it is, after all, your own money. But consider the down side. Borrowing from your retirement account could leave you with a much smaller fund in retirement. If you use your 401(k) to meet a short-term cash need, you probably won't be able to both contribute to the account and repay the loan, so for a time you're missing out on your company's matching contribution. Perhaps most important, if you can't meet the repayment schedule, the borrowed funds will be treated as a distribution subject to income tax, and if you're under age 59-1/2, subject to an early withdrawal penalty as well.

Bottom line: Whether a traditional 401(k) loan or a 401(k) debit card, tap your retirement savings only in emergencies and only as a last resort. Otherwise you'll have a smaller nest egg, and if you default on the loan, the possibility of serious tax consequences.







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