Do You Need A Pension Debit Card?

November 25th, 2008 | Category: Reverse Mortgage

There always seems to be a new way to get at pension money and the latest notion seems to be the 401(k) debit card.

Yes folks, step right up and use plastic to borrow from yourself. Needless to say, in exchange for that bright piece of plastic you get the right to pay the debit card company lots of money — your money.

As usual with these ideas, the concept of a debit card to access a 401(k) pension detail would seem, with some cautions, superficially logical. What are the cautions? Such things as how much does it cost to set up the debit card? Is there a fee for each use? How can you terminate the plan? Can anyone but you have access to the explanation? (Think of debit card companies withdrawing their money directly from your pension.)

The big caution, of course, is that every dollar taken from a pension fund today is a dollar you don’t have tomorrow.

Another is that spending with plastic is so easy, so simple, so bankrupting….

As an alternative to withdrawing from your pension with plastic, consider a reverse mortgage. It may invent more sense in terms of financial planning and unlike a “forward” mortgage there is no monthly payment called for for principal or interest.

Whatever you decide, before you decide, speak with such professionals as a fee-only financial planner or an attorney who specializes in elder law.

Here’s what the SEC has to say about 401(k) debit cards.

A number of companies are beginning to offer a “401(k) debit card” to employees who invest in 401(k) retirement programs. A 401(k) debit card allows you to borrow up to $50,000 or 50% of the value of your retirement plan, whichever is less, through use of a debit card. Unlike a debit card that deducts money from your checking or savings explanation, a 401(k) debit card withdrawal is a loan you build to yourself out of your retirement savings. More akin to a traditional credit card, you must repay the money you withdraw using the card, along with fees and interest –- or you may incur substantial penalties. There are a number of fundamental factors you should consider before using a 401(k) debit card:

___ You must pay fees and interest on amounts you borrow from your
401(k) plan.

___

You will likely pay interest and incur fees whether you use a 401(k) debit card to borrow money from your retirement savings. While some of the interest you pay will go back into your 401(k) explanation, a assured amount (called the “margin”) will be paid to the vendor of the card. In addition, the sorts of additional fees that may apply include: (i) an annual fee; (ii) a set up fee; (iii) a cash advance fee; and (iv) fees for other services, such as express delivery.

___ whether you do not pay the money back in the instance period due by the plan, there may be significant penalties and tax consequences.

Under IRS rules, you typically must repay the amount you borrow in five years or less, and may not fail to assemble payments for three consecutive months. whether you do not meet those conditions, you must pay taxes on your loan balance. In addition, whether you are younger than 59 1/2 years old, you will have to pay a 10% penalty.

___ The amounts set aside to borrow may earn a lower rate of return than the rest of your 401(k) assets.

The money you decide to borrow is set aside in a money market fund until you withdraw it. Money market funds may earn a lower rate of return than other investment options through a 401(k) history, such as investments in mutual funds or stocks.

___ Unlike your 401(k) contributions, you must manufacture repayments on your own, and not automatically through a payroll deduction.

Typically, 401(k) contributions are deducted directly from your payroll –- once you authorize the deductions, the money goes straight to your 401(k) automatically. Repayments of 401(k) debit card loans, however, are not deducted directly from your payroll — you must pay the balance yourself.

In short, you should think carefully before taking money out of your retirement detail under any circumstances, including with a 401(k) debit card, and weigh the above considerations carefully.

The Securities and Exchange Commission does not regulate or oversee retirement plans, such as pensions or 401(k) plans. whether you have a question or complaint about your retirement plan, please contact:

U.S. branch of Labor
Employee Benefits defense Administration
200 Constitution Avenue, NW, Room N5623
Washington, D.C. 20210
Phone (toll-free): 1-866-444-EBSA (3272)
Online: www.askebsa.dol.gov

Orginal post by Peter G. Miller

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