One of the benefits of the 401(k) plan is that in difficult times, one can take loans against one’s 401(k) account. These loans are different from other traditional loans as in this case a person borrows from his or her own savings. As one borrows from their savings, there are no hassles like credit check or other securities when opting for a 401(k) loan. But since the 401(k) accounts are maintained by the employer, granting provisions for a loan or granting a loan itself is solely at the employer’s disposal. In addition to that there are also certain rules that govern these loans. 401(k) debit cards work almost on similar principles, rules and regulations. When one avails the facility of a 401(k) debit card, it is actually a loan that one takes on their 401(k) savings account, where the loan works slightly differently from traditional 401(k) loan. Also 401(k) debit cards are not directly linked to the retirement savings account and hence the same kind of restrictions is not subjected to them.
- According to the statutes, one can borrow up to 50% or up to $50,000 – whichever is less, from their 401(k) account savings. The same rule applies to 401(k) debit cards as well. Generally, 401(k) loans are somewhat difficult to get even with a great number of larger companies (approximately 93 percent) offering them and it is even more difficult to get 401(k) loans if one works for a small business as, according to the Employee Benefit Research Institute, only a small number (approximately 27 percent) of such companies offer these plans. 401(k) debit cards can be a good option for employees of such companies who are in need of cash.
- In case of 401(k) loan, when one’s application for a loan is approved, that person’s investments are sold to raise the requested sum and the money is then disbursed directly into one’s checking account or in some cases, that person receives a check. One then has to use her/his (own) debit card to access these funds.
With a 401(k) debit card, when the loan is approved, the money is shifted to a ‘safe’ option or mostly a ‘money market’ account where the money continues earning interest until there is an actual withdrawal. The person gets a separate debit card that they can use to access the loan account.
- With most 401(k) loans, the loan has to be paid back in fixed payroll deductions that span a period of five years. The option to pay off the loan faster is not available and the only available option to settle the loan quick is to make a lump sum payment for the entire balance.
With some 401(k) debit cards, one can pay more amount than the specified minimum installment and can hence rid the loan in a shorter span than stipulated.
- The interest rate for traditional 401(k) loans is usually 1-2 percentage points above the prime rate where the total interest gained from the loan goes back to the employee’s 401(k) account.
Some 401(k) debit cards charge more than 2 percent above the prime rate where the extra percent of interest from the repayment goes to the 401(k) debit card administrator and the interest from the prime rate goes to the employee’s account.
- A heavy setback with most of the traditional 401(k) loans is that if the employee leaves the company or is laid off, the employee has to repay the loan within 90 days; failing which, the loan is considered as a permanent withdrawal which attracts all the taxes and penalties connected with such untimely withdrawal (where the employee is below the age of 59 ½). And since in this case the money cannot be put back, it results in heavy loss to the employee’s future savings.
With certain 401(k) debit cards, in such scenarios as leaving the company or getting laid off, the employee can still continue to repay the loan according to the planned schedule where the employee can pay the installments with checks or deduction/debits from personal checking account.
Even though 401(k) debit cards sound such a lucrative option, there are not many takers for them. At present there are only several thousand user’s of this facility when there are over 52 million 401(k) account holders in the US.