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401k Debit Cards – Why You Should Avoid them at all Costs

by Miranda Marquit

Many consumers are looking for easy access to additional funds since the financial crisis and recession. Even though the recession is technically over, many are still feeling the pinch. As a result, there has been a bigger move toward tapping retirement accounts as emergency funds.

One of the ways that it has been made easier to get a 401(k) loan is by adding a debit card to the account.

What is a 401(k) Debit Card?

401k debit cardMany 401k providers have begun allowing account holders to apply for a 401(k) debit card. Your 401(k) debit card can be used to access money that you already have in your account. However, even though it is called a debit card, it’s really more like a line of credit. When you use the 401(k) debit card, you end up paying fees and interest, and making payments to repay the loan. It’s true you are borrowing from yourself, but it can still result in lost opportunities. It reminds me more of the the card I have to access my Preferred Line of Credit at the bank, or the card you can get to access a HELOC.

It’s also important to note that you can’t just access your entire nest egg with a 401(k) debit card. First of all, your employer’s plan has to offer the option of using a 40(k) debit card. Then you end up with a pre-approved amount that you can draw on. That money is moved to a money market account, and you withdraw from that account. Even though the money attached to your 401(k) debit card does earn a return in the money market account, it may not be as much as your other assets are earning in the main account.

With the 401(k) debit card, all of your charges are added up on a daily basis. The total of daily charges counts as a single loan. Then, each month, all of your charges (and interest and fees) are added up. Realize that there is no grace period with your 401(k) debit card; the interest starts accruing as soon as charges appear on your card. Additionally, you should realize that the use of your 401(k) debit card can come with an annual fee, as well as a setup fee. Plus, you are charged a small fee each time you use the card to obtain cash. There is no waived fee for using the bank the account is set up at.

Why 401(k) Debit Cards are a Horrible Idea

When you look at the averages related to retirement, it becomes fairly obvious that the last thing consumers need is easy access to their 401(k) accounts. Not only will it cost in you in fees and interest, but you also miss out on earnings that you could receive. When that money isn’t in your account, earning a return, you lose out. That time (and the compound interest you would have earned) can’t be replaced.

Not only that, but being able to access your 401(k) so easily can lead to impulse spending. With your retirement account. It’s much easier to pull out the debit card and access your 401(k) funds with this process, and that can lead to impulse spending and serious problems with building your nest egg. Unfortunately, the very people that these debit cards are marketed toward are the very people that are the least likely to exercise restraint.

There have been a couple efforts to ban 401(k) debit cards, but they have, for the most part, amounted to nothing. The latest attempt has been referred to a committee, and doesn’t look as though it will make it out. Indeed, GovTrack reports that this bill has a 1% chance of being enacted.

Photo credit: Crystal Calderon


Published or updated January 7, 2013.
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{ 2 comments… read them below or add one }

1 Jon @ MoneySmartGuides

This is the first time I am hearing of such a product. On the one hand, it blows my mind that this product was created. But then on the other hand, sadly it doesn’t surprise me at all. I agree that this is an absolute horrible idea. Leave your retirement money for retirement.

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2 Ryan Guina

Jon, these have actually been around for a few years. The 401k providers often market them to their account holders as a way to manage money when things get tough. The reality is 401k debit cards generate a lot of revenue for the plan administrators and are horrible for consumers.

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