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Think Before Tapping a 401(K)
The big risk with 401(k) loans is that you'll leave your job. At that point, you have to repay in full. Some companies give you only 60 days of grace, others give you a year or more. If you can't make the deadline, your loan is treated as a withdrawal. Suddenly, you'll owe income taxes and penalties, and may not have the cash on hand. Never borrow when you're close to retirement or there are rumors of buyouts around.
A controversial new way of borrowing against a 401(k) has popped up in plans serviced by Reserve Solutions, based in New York City. Workers get a debit card that they can use at retail outlets and ATMs. Chairman Bruce Bent argues that the card lets workers borrow as needed instead of taking lump sums, gives them five years to repay even if they leave their jobs and simplifies borrowing for union members who work for more than one employer.
"This idea got some play 15 years ago but was skewered in the industry," says Nevin Adams, editor in chief of PLANSPONSOR .com, which reports on trends in plans. FINRA, the agency that regulates securities firms, took a swing at these cards last month in an "Investor Alert" headed THINK BEFORE YOU SWIPE. I don't like plastic in 401(k)s because it becomes so easy to spend. It never hurts to keep borrowing hard.
Reporter Associate: Temma Ehrenfeld
© 2008
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Member Comments
Posted By: towarnj @ 07/18/2008 8:01:41 PM
Comment: Comment: Thanks for your balanced approach - confirming the preference for loans over withdrawals. Some studies show that loans have almost no impact on retirement savings when the individual continues contributions and repays the loan. Even more studies show that if you restrict access, people will save less or not at all. We should be creating designs and policies that encourage people to save more than they think they can afford to earmark for retirement, offer access via loans, and make repayment easy. Remember, people had to first save before they qualify for a 401(k) loan. Save, borrow, repay to rebuild the account; repeat over and over until retirement. The goals here should be to encourage people to save more than they think they can afford to earmark for retirement, to design plans to favor 401(k) loans over 401(k) withdrawals, and to implement processes that facilitate loan repayment.
Posted By: trixie8476@hotmail.com @ 07/01/2008 12:26:11 PM
Comment: These articles just make people feel bad. Most people aren't tapping a 401k unless they truly feel they have no other options...