Wednesday, January 16, 2008

Hurry, Get your 401(k) Debit Card!!

Need some quick cash but no time to fill out a loan request? No problem. Just pull out your handy debit card and tap into your 401(k) retirement! Plastic makes everything easier, doesn’t it?

As unbelievable as this sounds, yes it is true. A company called The Reserve has a new service called ReservePlus that administers 401(k) loans through a debit card.

Evidently the IRS does have some limits on this deal. A participant is only allowed to borrow 50% of their account balance or a maximum of $50,000. That's Incredible. 401(k) loans of any type are a terrible deal because of the double taxation. The loan must be re-paid with after tax money that will then be taxed again at withdrawal.

Nonetheless, the new debit loan differs from a traditional 401(k) loan in a few ways.


1) No Payroll deduction. Participants can repay the loan when they are able to add funds at anytime. This sounds like a potential disaster – every loan should have a schedule of payments.

2) No amortization schedule, no annual fee. ReservePlus generates income by keeping a percentage of the interest on loan repayments from participants.

3) The loan amount is not withdrawn in one lump sum, rather it is moved to a money market account where it can be accessed with the debit card. At least the principal loan amount will be accumulating interest.

ReservePlus touts the program by saying that not only does it make it easier to access 401(k) money, but it is expected to increase 401(k) participation. With easier access, it is anticipated that the availability of a loan will result in more employees enrolling and contributing to a 401(k) plan.

I would agree with that, since I have known several co-workers who did not want to participate in a 401(k) because the money would be “too hard to access for emergencies.” It was a convenient excuse for them to not participate. So it’s possible that a plan like this would get them enrolled, but I think it would also be too tempting and way too easy to use the debit card to buy unnecessary junk on impulse and sabotage their retirement plan at the same time.

As a side note, the one event at my place of employment that did get more people to contribute to their 401(k) was the increasing of income tax rates. When Clinton raised the rates back in the 90’s, several of my co-workers decided to take action to shelter some of their income through pre-tax contributions to a 401(k). Of course, they were cussing him at the time –but now they are very glad that they invested in their retirement.

3 comments:

  1. Good article on a very evil subject - thanks, Kristin.

    I just ran a quick calc using some conservative numbers. Assuming a person pays off their (sadly misguided) purchase in a year, the cost is 1.6 times (1.6!!!!) the "store" price. When you factor in the loss of compounding over a 25-year horizon, that number jumps to 3.6. (I would put a lot more !s in here, but you get the point.)

    Argh.

    Dave

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  2. Thanks for the comment.

    Yes, a 401(k) loan of any type is a very costly way to buy anything.

    Since Uncle Sam wants us to spend every dime we have, I would not be surprised to see more "deals" like this that would allow folks to more conveniently tap into other retirement accounts like IRAs, maybe even pensions!

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  3. You are providing me very informative, needful and accurate thing through this content about Debit card. so please continue your good work. i am very thankful to you.

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