Tuesday, February 19, 2008

401(k) Debit Card

This is, without a doubt, one of the worst ideas ever.

A new debit card that lets consumers use ATMs to withdraw money from their 401(k) plans is drawing a sharp reaction from financial planners.
The ReservePlus card is marketed by Reserve Solutions Inc., a New York financial firm that says it has 10,000 cardholders already.

The debit cards allow cardholders to take out loans from their employer-sponsored 401(k) retirement funds. Normally, restrictions on the funds discourage account holders from making withdrawals before they are 59½ years old.

Early withdrawals from 401(k) plans come with taxes and fees, which could deprive account holders of their nest eggs if they fail to replace the money promptly.

Financial planners warn consumers to be cautious about taking money out of retirement plans, especially as the nation's economic slowdown makes withdrawals more tempting.
Investing 101 teaches you to avoid drawing money out of your retirement account to pay for short-term needs. The loss in accrued interest on the principal, to say nothing of the unlikelihood of ever paying it back in the first place, can be devastating to your cash reserves.

Anecdotally, a lot of people seem to be withdrawing money from their retirement accounts to pay their mortgages.

Having to choose between keeping your home or being able to retire one day - is this that "ownership society" that Bush used to talk about?