Borrowing against retirement savings

[img_assist|nid=7824|title=|desc=|link=none|align=left|width=100|height=84]The Financial Industry Regulatory Authority (FINRA), a non-governmental agency warns consumers about new 401(k) debit cards that make it easy to swipe away money from a retirement fund.

The card is said to represent a hybrid of a debit and credit card that charges a fee plus interest for accessing money in a retirement account.

"Regardless of how easy it might be to do, borrowing against your retirement savings should be a last resort and done only in emergency situations," says John Gannon, FINRA senior vice president for investor education.

On the basis of the federal tax code a 401(k) plan was developed as a retirement savings plan funded by an employee's pretax salary contributions. It grows tax-free until money is withdrawn. The plan gets its name from a chapter of the code. Usually consumers begin useing their 401(k) funds through low-interest loans or hardship withdrawals earlier.

The lesser evil in such early expense of retirement funds is reduced savings capital which easily may turn into loan default.

"Here you're basically putting another piece of plastic in your wallet to use however you want, even to buy a latte or a pizza," states Gannon said. "It might make it awfully enticing for someone who's maxed out their other credit cards."

For using this card customer receives the bill that includes a minimum payment, interest and fees plus additional interest paid to the card vendor.

The total sum the user spends a day both by swiping the card or writing checks is treated as a single loan. Thus by making purchases day by day a user accumulates loans daily each of them having different repayment terms at that.

Total borrowing amount is to undergo an employer's approval and each loan should be reimbursed within 5 years or less.

"Remember that with every swipe comes the potential to wipe out a portion your hard-earned retirement savings," FINRA warns.