Comments on: Debit Cards for 401(k) Plans – Can You Say “Bad Idea”? http://www.creditinfocenter.com/wordpress/2008/07/25/debit-cards-for-401k-plans/ For the Up To Date News Fri, 12 Mar 2010 06:49:26 +0000 http://wordpress.org/?v=abc hourly 1 By: jq26 http://www.creditinfocenter.com/wordpress/2008/07/25/debit-cards-for-401k-plans/comment-page-1/#comment-458 jq26 Fri, 25 Jul 2008 23:54:48 +0000 http://www.creditinfocenter.com/wordpress/2008/07/25/debit-cards-for-401k-plans/#comment-458 Just a few little things. I work for a fortune 500 company. Our plan allows us to tap our 401k whenever we want for whatever reason. You don't have to have any special reason at all. Just have to go online and click a few times. And within 5 days a check appears in your mailbox. The only rule is that you can only take one loan per year (but you can have as many loans as you want outstanding at any given time). So I'm not sure that the last point is accurate- you don't need to have medical bills or a looming home purchase. This is not unusual from talking to other people. The other thing to consider I touched on in the post above- there are tax considerations. If buying an appreciating capital asset, a 401k loan is not so bad. You receive the same tax free compounding outside of your 401k and then you pay 0-15% capital gains rates when you liquidate. In a 401k you get tax free compounding but then you pay ordinary marginal rates (as much as 33%). If paying credit cards off or going on vacation, then 401k loans are a total disaster. Totally agree there. And just one more point- my 401k gave me no way to short the market over the past year. So I took a 401k loan and invested in SRS and QID ultrashorts. They are up about 20%. Now I have 120% of my balance. But here is the best part. In the interim, the price of my 401k mutual fund shares fell 30%. So now I am buying back those mutual fund shares at 70% the price. All in all, the 30% reduction in price and the 20% increase in loan cash I now have create a net 50% gain during a time when the rest of my 401k plummeted. In other words, it was a backdoor way to hedge this crappy market that my 401k wouldn't otherwise allow. Just a few little things. I work for a fortune 500 company. Our plan allows us to tap our 401k whenever we want for whatever reason. You don’t have to have any special reason at all. Just have to go online and click a few times. And within 5 days a check appears in your mailbox. The only rule is that you can only take one loan per year (but you can have as many loans as you want outstanding at any given time). So I’m not sure that the last point is accurate- you don’t need to have medical bills or a looming home purchase. This is not unusual from talking to other people.

The other thing to consider I touched on in the post above- there are tax considerations. If buying an appreciating capital asset, a 401k loan is not so bad. You receive the same tax free compounding outside of your 401k and then you pay 0-15% capital gains rates when you liquidate. In a 401k you get tax free compounding but then you pay ordinary marginal rates (as much as 33%).

If paying credit cards off or going on vacation, then 401k loans are a total disaster. Totally agree there.

And just one more point- my 401k gave me no way to short the market over the past year. So I took a 401k loan and invested in SRS and QID ultrashorts. They are up about 20%. Now I have 120% of my balance. But here is the best part. In the interim, the price of my 401k mutual fund shares fell 30%. So now I am buying back those mutual fund shares at 70% the price. All in all, the 30% reduction in price and the 20% increase in loan cash I now have create a net 50% gain during a time when the rest of my 401k plummeted. In other words, it was a backdoor way to hedge this crappy market that my 401k wouldn’t otherwise allow.

]]>