Borrow From Your 401(k) Account with a Debit Card No More?
We can’t stress enough how important it is for everyone to participate in their companies 401(k) retirement program, especially if there is a match involved. Sadly, people are starting to tap their 401(k) accounts early and easily by using a debit card linked to their retirement funds.
Debit card 401(k) withdrawals were actually created thinking people would be more willing to open a retirement account if they knew there was an easier way to access the money. At least, this is the reason the industry offering such transactions says. The truth may be a little less consumer friendly considering fees, taxes, interest and lost savings.
401(k) accounts allow participants to borrow up to 50 percent of their savings with no penalty, only if the loan is paid back within five years. But, if your money is out of the account, it is not earning a return. In addition, the money taken out of the tax sheltered account is now taxable and if not paid back within 5 years faces a 10 percent penalty. After all of this, once you retire and take the money back out of the 401(k) account for retirement, you will once again pay taxes on the amount you borrowed. So if you don’t pay back your loan in time, you face a 10 percent penalty; taxes within your tax bracket; loss of investment interest; and once again taxes when the money is used for it’s actual purpose - retirement. It’s estimated that a 401(k) loan can reduce your retirement savings by more than 20 percent.
Borrowing from your 401(k) is something that should be treated as a last resort and that’s it. We are not the only ones who think this way. Senator Kohl (D-WI) and Sen. Schumer (D-NY) have introduced legislation that would ban the borrowing from ones 401(k) account with the ease of a debit card. While I’m happy the Senators recognize the detrimental effects borrowing from your retirement account brings, I’m not so optimistic the legislation will pass, at least not in the short-term.
Although Kohl will most likely be able to pass the bill out of the committee he chairs, the chances of passing the entire Senate is unlikely. The 60 votes needed to even bring the bill to a vote will be difficult to achieve – especially during an election year when many campaign funds are coming from financial services companies allowing such 401(k) loans. In addition, the idea that the money is yours and why shouldn’t you be able to access it, will bog down the Democrats attempt to take away this debit card temptation. I hope I’m proved wrong. $
Related articles you might be interested in:
If you enjoyed this post, please consider to leave a comment or subscribe to the feed and get future articles delivered to your feed reader or email.
Comments
This is stupidity. To take money out of your retirement fund just so you can have what you want now. That is of course unless you have enough money behind you to retire EXTREMELY wealthy. Otherwise it is simply just too risky. You need to be looking out for your retirement. We can’t just rely on the government
@ Ryan: I was shocked as well and even more shocked that it hadnt been stricken right away. There are so many other ways to do this and just to benefit some fund managers…amazing.
@ Jessica: Thats exactly what the cards were created for, so that all that money could be made available. Some might say that it makes good sense to withdraw some of that to pay down debt thats building at a faster interest rate, but the fees and penalties are gruesome. Not to mention you shoot yourself in the foot later when you REALLY need it, like you said, you lose out on your retirement money. Thanks for commenting!
I guess the debit cards were made available to access 401k funds easily and that’s the reason perhaps it has increased the number of people withdrawing 401k money even when they can use some other option. But it’s always a good option to keep your 401k money safe, otherwise you lose a lump sum part of your retirement money.
Regards,
Jessica