Jan 27th, 2008
The 401(k) Debit Card: Worst Invention of All Time
For years, many people have been against taking loans out against your 401(k) except in dire circumstances (myself included) due to the many pitfalls involved. To make it easier for folks to fall into this trap, there are now 401(k) debit cards. That’s correct, people can apply to have a loan on their 401(k) but make that line of credit accessible with a debit card.
That’s right, a debit card.
I was so shocked that such a thing existed I had to search for information on it to make sure it wasn’t a hoax being played on the personal finance blogosphere.
It’s real, unfortunately.
So besides depriving yourself of the potential gains your money would have by being loaned out of your 401(k) and exposing yourself to double taxation with this type of loan [your contributions to the 401(k) are tax deferred, but when you take money out--hopefully in retirement--it'll be taxed as ordinary income; if you take out a loan prior to retirement, you'll be paying it back in post-tax dollars, effectively causing double taxation], the debit card makes it ridiculously easy for the undisciplined spender to tap into their retirement savings. Combine that with the fact that 401(k) plans–one of the greatest inventions since sliced bread–are notoriously underfunded by participants and you can see that those who haven’t been saving hardly anything at all for retirements really don’t need a way to sabotage their limited efforts easily.
Traditional pensions are almost extinct. For many, a 401(k) is their retirement, if not the vast majority of it. Borrowing against your retirement is taking a very large risk. At least with 401(k) loans, there were some serious hoops to jump through and a requirement that you’d think about it for awhile. Now, with a debit card, it’s possible that you could make the same mistake over and over and over again without much consideration.
So be careful out there; debt can be dangerous, and certain types can be extremely dangerous. Using your retirement fund as a piggy bank can have significant negative long term consequences to your financial health! Proceed with extreme caution if you’re considering this.
[...] Original post by Uncommon Cents [...]
That’s just the stupidest thing I’ve ever heard of.
[...] post by Uncommon Cents and software by Elliott Back Post a [...]
I agree it’s stupid, but hopefully people will read this post and not succumb to their own stupidity.
I agree. Very very stupid. If you need a loan, get a loan. If you need to withdraw for an emergency, make a withdrawl and take the penalty. But don’t make it so that you can just get the money any time you feel like it.
I agree. Stupid, plain and simple.
People already mortgage their future by going into debt, why on earth would someone want to dig the hole deeper? Just to buy something they don’t need to impress the neighbors?