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The 401(k) Debit Card: A Really Bad Idea

Imagine going into a store and buying a pair of jeans with your 401(k) plan. Sounds insane, right? But as more and more companies offer the 401(k) debit card as an employee benefit, people now have the option to use their retirement savings as a checking account!

How It Works

A person can open up a debit card directly linked to their 401(k) plan. By doing this, a line of credit will also be opened against the amount available to borrow through the loan provisions of the plan.

This differs dramatically from a typical 401(k) loan. A 401(k) loan will automatically be repaid via payroll deduction. This isn't the case with the 401(k) debit card. The individual is billed each month for any purchases made with the card, just like a credit card. Unlike the 401(k) loan, using the 401(k) debit card allows a careless person to easily get behind in payments and possibly default on the loan. This, of course, will result in extensive taxes and penalties.

Some argue that the 401(k) debit card will encourage more team members to participate in retirement planning. Although companies desire to see more workers sign up for retirement benefits, this is not the way to do it.

Why It's Not Smart

There are two main reasons why a company that values its team members should not incorporate this card into their culture:

  • Start-up fees and interest on the loan - good money down the drain.
  • Instant access to retirement funds can lead to an impulsive downward spiral.

The ease of spending retirement funding will only hurt the team member in the long run. Making purchases with retirement funds is never a good idea.

Traditional 401(k) loans can take days to process. An individual must apply for the loan by filling out paperwork. Many times, the simple act of filling out the paperwork will cause the person to change his mind. Once the loan is approved, the borrower will not have instant access to the funds because it takes a few days for everything to process. In general, people who take out 401(k) loans typically use them for emergencies only.

The new 401(k) debit card changes all of that. A person has instant access to retirement funds and can make impulse purchases immediately because there is no waiting or paperwork to be done. It's easy for people to tell themselves that they will repay the loan as soon as they have the money, but because the loan is billed through recurring monthly statements, many people will get behind in paying it back. This just spirals into the same problem that many people have with credit card debt.
If a person is signing up for the 401(k) debit card in the first place, do you really think he or she will be able to pay the bill on time without defaulting on the loan?

A company that truly cares about its team members and wants them to succeed in life should not adopt the 401(k) debit card. It will only hurt workers.

Offer a real team benefit in your company by offering Dave Ramsey's Financial Wellness.

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Ramsey Solutions

About the author


Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

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