By: LINDSEY O’NEILL, ESQ.
A big trend in borrowing these days is borrowing against your 401K retirement account. It’s even easier than ever… did you know people are being issued “401K Debit Cards”? They’re just like other debit cards in that you can use them for pin-based transactions anywhere debit cards are accepted. Of course, instead of debiting your checking or savings account, you’re taking money out of your retirement fund. First we used up the equity in our homes. Now we’re using up our retirement? Wow…
Many agencies are warning consumers against using 401K Debit Cards because of the potentially serious consequences that could result. Not only would your retirement savings dwindle, but you could lose many important rights and protections by tapping your retirement in this fashion. Not only are you billed for the charges you rack up, you are subject to paying other fees commonly charged in the debit/credit markets, including: interest, late fees, set-up fees, cash advance fees, etc. Also, what happens if you lose your job? You should fully understand the terms and conditions of your plan. Finally, consult an attorney or tax professional regarding what tax rights you may be risking by using the money out of your 401K fund rather than another type of loan, particularly if you plan on using the money for items that carry tax deductions in other circumtances.
The SEC has published an online brochure about 401K Debit Cards, which nicely outlines some important issues you should consider before using a 401K Debit Card. Check it out here: 401(k) Debit Cards: What You Might Not Know.
