You do not want this debit card in your wallet
Filed under: Retire, Ripoffs and Scams
Reserve Solutions is marketing a new kind of debit card - one that lets you stop at the ATM and withdraw money from your 401(k). The withdrawals are treated as loans against your retirement account, and you must repay the funds to the plan with interest. Of course, it's being marketed as a convenient way to access your money in a time of need.
But this is the most horrible idea ever. 401(k) funds are meant to be saved for retirement, not frittered away when you're a little low on cash. This card is a disaster waiting to happen... with consumers having immediate access to funds... possibly without thinking it all the way through.
Even though the funds withdrawn will initially be treated as a loan, that loan can quickly turn into a "distribution" if the employee defaults on the loan or leaves the employer (and therefore the plan). And taking a distribution from your 401(k) before you're retirement age can have dire tax consequences. In addition to regular income taxes that may be owed on the withdrawal, there are federal and state penalties that often apply. People typically end up losing about 50% of their money to the taxes and penalties.
If you need money and you have a 401(k), the first step is to stop contributing to that plan and use the money that would have gone into the plan for your current needs. The next step is to find cash anywhere but the retirement plan. Withdrawing from the 401(k) should be an absolute last resort, and should only be done in the direst of circumstances.
Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.
But this is the most horrible idea ever. 401(k) funds are meant to be saved for retirement, not frittered away when you're a little low on cash. This card is a disaster waiting to happen... with consumers having immediate access to funds... possibly without thinking it all the way through.
Even though the funds withdrawn will initially be treated as a loan, that loan can quickly turn into a "distribution" if the employee defaults on the loan or leaves the employer (and therefore the plan). And taking a distribution from your 401(k) before you're retirement age can have dire tax consequences. In addition to regular income taxes that may be owed on the withdrawal, there are federal and state penalties that often apply. People typically end up losing about 50% of their money to the taxes and penalties.
If you need money and you have a 401(k), the first step is to stop contributing to that plan and use the money that would have gone into the plan for your current needs. The next step is to find cash anywhere but the retirement plan. Withdrawing from the 401(k) should be an absolute last resort, and should only be done in the direst of circumstances.
Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.
Recent Posts
- Where the jobs will be: Obama's green energy economy and you (12/01/2008)
- New York busts shady tax preparers (12/01/2008)
- Why I'm holding on to my CostCo card (12/01/2008)
- Hold your noses: Economy slashes plastic surgeons' business (12/01/2008)
- Tax Tips: Potential break for retirees (12/01/2008)
Reader Comments (Page 1 of 5)
2-05-2008 @ 6:54AM
steve said...
I took retirement money after leaving a city job due to family illness. The city would not allow a leave of absence because the relative was not living with me. But she was dying of cancer and needed at home care. So i took the money and the penalties that went with it. But I should have fought the city in court if necessary. I gave up a job I had 22 years invested in. It was a mistake. Now at age 52 I have no retirement money.
Reply
2-05-2008 @ 1:27PM
Tony said...
Just from your couple of lines I know you are a pathetic whinner. You made a choice now live with it and stop crying.
2-05-2008 @ 5:24PM
Justin said...
Wow, Tony.
You've managed to be make a reply that was irrelevant to the topic as well as be a jerk. Why don't you find some friends and have something better to do with your time.
As for myself, I ended up taking out a loan on my 401(k) to pay for my wedding. SO FAR, I've been able to keep up with paying it back, and I dig the fact that the interest goes back into my account.
The flexibility to take a loan on my retirement money made an important day spectacular for my wife and me. That said, I would HATE to have day to day access to that money. I have no willpower when it comes to money, and I would certainly do foolish things with it given the opportunity. I have to take very particular pains to save money, and my 401(k) has been huge for me in that regard.
So, these ATM cards are a terrible idea, but the ability to take a loan from your retirement is an excellent one.
2-06-2008 @ 7:45AM
Robert said...
JUSTIN: So, these ATM cards are a terrible idea.
ROBERT: Correction: They are a terrible idea for you -- and people like you -- who admittedly have no fiscal self control.
There's no need to demonize an otherwise worthwhile tool that promotes 401k investment and benefits the greater good over your lesser vice.
2-06-2008 @ 8:38AM
Jennifer said...
My comment was not meant to belittle or judge your situation. A health crisis cannot be helped. My comment was more for those who have a financial crisis because they live beyond their means and have wasted their money. Should have been more specific. Hope things are better for you now.
2-06-2008 @ 12:16PM
Ron said...
Steve...
You should have arranged for a rollover into an IRA when you left the city job rather than taking the money as a distribution.
Hopefully, you saved the money you did take out towards your retirement rather than spending it.
2-07-2008 @ 8:01AM
Nan said...
Steve,
Hind site can be a wonderful learning experience. Making a decision to take the money to be there during the limited time you had left to spend with your wife are priceless. At 52 you still have time to rebuild for retirement.
As far as this debit card I think it is a very scary. Just another way to try and get people to spend money and not save for the future...their retirement.
2-05-2008 @ 7:15AM
Booker said...
I also took the money when i truly needed it, and am now just starting to save again. I agree that you should not touch that money, but sometimes there are extraordinary circumstances that dictate you take it. After all, there is no guarantee that you you are even gouing to live long enough to retire.
Reply
2-05-2008 @ 7:21AM
Jennifer said...
Bad Bad Bad Idea! Struggling with money is hard when your young...when your old and a job even harder to find, bad idea. This whole country needs to wise up and make better money choices. Nothing but retirement is going to make me touch my retirement money.
Reply
2-05-2008 @ 11:45AM
twixt said...
It is really a shame the government allowed companies to eliminate true retirement plans .It is great for the CEO of the companies as he has saved millions with the move. However when great grandpa retired after 25 years with the compay he left making about 1500 a month add to that social security and the health plan associated with the retirement he did pretty darn good. My plan when I joined a Waste company 30 years ago would have given me approx 2700 a month plus soc sec and my city retirement of 200 a month.The government allowed the waste company to steal our retirement reducing my retirement to 170000 which the government penalized us at 48% allowing me to invest the rest.Enron hit the road running so after 10 "great years" I have 130000 left to divide into my "GOLDEN YEARS"But I am "SO PROUD " to say the Ceo that stole ,(oops I mean bettered our retirement program ) retired with 26 million dollars and a thank you from waste managment as to how well the company was performing .(Little secret I will let you in on ) the company big shots would have went under if it wasn't for us little guys.
2-05-2008 @ 9:12PM
steve said...
I hope you never suffer a family illness or other emergency. You may yet find a need for the money before maturity.
2-05-2008 @ 7:58AM
Alice said...
The mortgage crisis (Savings & Loan debacle) was created by stupid people wanting something they HAD NOT earned, not the republicans. Working folks need to also use their brain to figure out there is no "free lunch"!
Reply
2-05-2008 @ 8:23AM
Arline Backus said...
Thank heavens we have Republicans.............who else would unknowledgeable democrats blame
Reply
2-05-2008 @ 8:27AM
Cecil said...
Let's see...put away money now before you pay taxes on it and get it later when your tax is lower...did anyone ever think that there would be greed involved by lenders and politicians when they see all those dollars add up, un-taxed...of course someone will always try to access these funds. Just have to think about it and "Just say NO"!!
Reply
2-05-2008 @ 8:35AM
Robert said...
HERE'S 5 FACTS COENEN DIDN'T SHARE:
[1] You can already take loans from 401k accounts.
[2] The debit card only permits 1-loan at a time.
[3] The average 401k debit card loan is $1,600 LESS than the conventional 401k loan http://www.reservesolutions.com/pdfs/Workforce_web_9.07.pdf
[4] Employee participation rates are 6% HIGHER in plans with loan provisions.
[5] Employer interest in starting 401k programs are higher when plans have debit card provisions. Why? It's easier for companies to reconcile debts from employees who make loans then quit their employment.
And NOW you know...
...the REST of the story.
Reply
2-05-2008 @ 1:57PM
mikesg said...
thank you for the information and not being just another cry baby whom only complaines
2-05-2008 @ 8:41AM
Mikey the Nail said...
This is precisely the sort of corporate fleecing that needs to be PREVENTED BY LAW.
Time now for some long-overdue government regulation of the freewheeling corporatocracy in this country. We are all going to pay a big price someday for having created a fend-for-yourself society.
Reply
2-05-2008 @ 11:47AM
twixt said...
They do have laws outlawing theft by deception however if you wish to get anywhere with crime you must find A an attorney not involved in the market ,having money that can't be touched by others B Ajudge that is willing to step in to deep trouble with politicos,investors , mafia OOps I mean upstanding citizens of this country that make miner mistakes of judgement which causes you to suffer ,
2-05-2008 @ 3:01PM
jebg said...
what do you mean by 'created a fend for yourself society"???? The USA was founded on self reliance and self responsibility. If you want to be taken care of and not have to 'fend for yourself', try one of the socialist, facist or communistic countries - you can go south, east or west. One of the first settlements from Europe was set up so all shared the fruits of each other's labor - food,etc. After finding that many chose not to work but to help themselves to the product of another's labor, the settlement changed its rules to more of you want to eat, you grow it... The settlement, overall, was much more productive and successful. oh yeah, I sorry, I do not work my butt off just to be told I have to take care of you- however, I do donate a lot of my time and services to voluntarily take care of others - and help them help themselves.
2-05-2008 @ 8:48AM
Bob said...
What does the Republican party have to do with the Mortgage crisis? Oh, that's right...Bush made all these idiots sign loans they couldn't afford.
Reply