Turning Your 401(k) Plan Into An ATM Machine

I thought that I had seen just about everything when it comes to borrowing money. There are so many crazy programs on the market that end up putting the consumer in a trap. You can watch what is happening in the mortgage markets to get a good example.

Those loan programs were the worst of consumer traps.

Well a company had the bright idea of marketing a program to companies that allows their employees to have a debit card on their 401(k) plan. Now that you can no longer treat your home like an ATM machine, in steps your 401(k) plan.

Here is how it works – An employee gets approved for a loan line. They basically have that amount of money, approved to borrow, waiting to be borrowed for any reason. Interest isn’t charged until the employee takes money out of the account through the use of the debit card. They can take as much or as little as they want.

Then the company who set up the program bills them directly like a credit card. The employee pays a pretty stout interest rate on that money and a nice up-front fee.

There should be watch groups that prevent these types of products from being introduced into the market place. These 401(k) plans should be considered sacred. They are there for an individual’s future. From the standpoint of a loan, borrowing from a 401(k) plan should be in extreme emergency situation where there is just not any other choice.

Retirement saving in America is dangerously low. I am hoping that a program like this does not catch on. The last thing in the world consumers need is the temptation to just take money out as they wish from their 401(k) plan.

Incidentally, when you pay back interest on a loan from your 401(k) plan, you are paying it back with money that has already been taxed. Down the road when you take out that money that was used to pay the interest on your loan, you pay taxes on it a second time.

At least with a 401(k) loan and not this debit card program, you pay yourself back the interest and not out to some company.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.