A 401 (k) debit credit card allows you to borrow money from your retirement savings account and repay the loan within a defined time. It is worth noting that the funds on your 401(k) account must be approved for the loan in order for you to access and spend it.
How does the 401 (k) debit credit card work?
The 401 (k) debit card is a special form of a credit and debit card. It is often provided to employees by their employer where you assign some amount of savings or contributions towards your 401 (k) plan. This contribution becomes your credit and using the 401(k) debit card, you can access it at your point of choice. You will then be required to pay within an agreed time at a set interest rate. This card should be used with caution because if abused, you put your future at risk of financial difficulties.
Pros of 401 (k) debit cards:
Using your 401 (k) debit card to access your 401 (k) loan will give you these benefits:
i. Quick access to funds
In most cases, your 401 (k) account loan does not involve paperwork or other lengthy applications. As long as the loan has been approved, the 401 (k) debit credit card allows you to access the funds easily and almost immediately.
ii. Flexible repayment period
The 401(k) card gives you a longer time to repay your loan, usually 60 months and is in most cases through monthly payroll deductions. Even in the event that you lose your job for whatever reason, you still have enough time to repay your loan.
iii. Earns interest
Your funds are put in a money market fund, which earns for all the time it is there.
You can obtain a loan without the knowledge of your workmates, which lets you keep your money matters private. You also don’t need to give reasons or explanations for your actions.
Cons of using a 401(k) debit credit card:
The potential cons of using 401 (k) debit cards are:
i. No grace period
When you withdraw any amount of money, you are charged interest immediately, a major difference with other credit cards.
ii. Encourages impulse spending
Since it is so easy to access this loan, careless spenders can fall into the temptation of impulse buying just because they have money on their cards.
iii. Missing out on earnings
When you take that money out of your account, you are losing out on the interest that your money could be earning.
What you need to ask yourself before making an application for a 401(k) loan and using your 401(k) debit credit card to access it:
• Why do you need the loan?
You should carefully evaluate your reasons for taking up the loan. Your reasons should be towards attaining an important fiscal goal. Avoid taking the loan if it is to settle other debts or if it is aimed towards unnecessary liabilities.
• What is the cost of the loan?
Since the loan will cost you in terms of interest and other fees, you need to know of this cost.
• Is this your last resort?
If you can access money without touching on your retirement savings, use it first. This is especially if it is a cheaper alternative.
• Do you have other assets or income you can use to repay the loan?
If you have extra income that you can use to repay your loan before the expiry of the repayment period, you will save on the interest accrued.
Any loan type including the 401(k) loan is a good source of extra income that if used and invested wisely could improve your life greatly. However, it should be used as the last result after evaluating other cheaper options since it comes with a cost.
Make a prior spending list of how you will use the loan and refrain from impulse buying. You will be paying an interest any time you use your debit card, so avoid unnecessary withdrawals.
When making your repayment plan, you may find you need to stop contributing to 401(k) account to ease your budget. This means you will also be missing out on your employer contribution, so create a plan that will see you contributing again as soon as possible.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning company based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last ten years has turned his focus to self-directed ira accounts and alternative investments. If you need help and guidance with traditional or alternative investments, call him today (866) 639-0066.