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March 14, 2013

What You Should Know About 401(k) Debit Cards

by Renee Simpkins
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Have you ever considered using your 401(k) as a checking account? Some companies think it’s a good idea. They believe in it so much they are issuing debit cards that link directly to your 401(k) account. Using this debit card allows you to bypass the traditional processes when borrowing against your 401(k) and gives you instant access to loans when an emergency arises. Here are some of the main things you’ll want to know about these cards.

What Is A 401(k) Debit Card?

Many people are familiar with the notion of borrowing against their retirement plans. The 401(k) debit card makes this easy by opening up a line of credit to those with 401(k) accounts. You are given instant access to the funds available using a card that is just like a standard credit card. Employers will set spending limits for your card based on your 401(k) participation and will bill you monthly for whatever funds were used. This can come in handy if you need to have access to emergency funds right away.

Benefits

People using the debit card do not tie up money from their regular savings accounts when they have emergencies. Having access to the funds in the 401(k) account can help when a person has limited income. The process to access these funds is pretty straightforward and do not require you to go through your HR department to fill out paperwork. The loan payback time is significantly longer compared to traditional loan terms. This makes it much easier for you to pay back the loan with little stress.

Drawbacks

People worry that the access you’re given makes the funds too readily available and could cause you to spend your money carelessly. Cardholders can swipe their card wherever they go, just like a credit card. This may result in people spending more than they expect to.

With 401(k) debit cards, you are billed monthly just like you would be if you used a credit card whereas, with traditional 401(k) repayment you would pay back the money directly from your pay check. If you leave your employer, the pay back time changes and you are required to pay back the entire amount within 90 days of leaving your job. This could be a challenge for anyone who is not leaving for another job and has become unemployed.

When you have access to emergency funds, handling unexpected situations are much easier. However, this can work against some people who are not completely responsible and use their retirement funds for non-emergency issues. You should keep in mind that your retirement fund is to support after you are no longer able to work. Before using a 401(k) debit card, make certain there will be no backlashes from your decision.

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