401(K) DEBIT DRAWS RED FLAGS
February 18, 2008
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, says the Washington Times.
- The ReservePlus card, marketed by financial firm Reserve Solutions Inc., allows 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.
- The ReservePlus program allows employees to transfer approved loans into online accounts that continue to earn interest.
- Employees then can withdraw cash from the account at ATMs, up to the maximum approved by their employers.
- They also can use their debit cards to buy goods and services.
Employees always have been able to take out loans against their 401(k) accounts, but not with ATM cards, says the Times. Financial planners are warning consumers to be cautious about taking money out of retirement plans, especially as the nation's economic slowdown makes withdrawals more tempting.
"For every $10 you take out of the account, you only have $6 or $7 to spend, probably closer to $6, which means you're giving up a third of your money," said Stuart Ritter, certified financial planner for T. Rowe Price, a Baltimore asset-management company. "You're also giving up money to spend in retirement, so you are by definition lowering your lifestyle in retirement."
Source: Tom Ramstack, "401(k) debit draws red flags," Washington Times, February 18, 2008.
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