Legislation would prevent debit card access to 401k…
New legislation introduced in July in the U.S. Senate by Democrat Sen. Charles Schumer of New York would ban the ability to link a debit card to a retirement savings account, aptly known as a 401(k) card, a hybrid between a credit and debit card. A 401(k) card lets you borrow from your own retirement account and then pay yourself back, with interest. When using one, the total amount the user spends each day counts as a single loan, possibly resulting in multiple loans with different repayment terms.
The repayment of a 401K debit card includes interest and fees, a minimum payment, plus an additional percent paid to the card vendor. The amount of total borrowing must be approved by a user’s employer, and each loan generally must be repaid in five years or less.
The Financial Industry Regulatory Authority (FINRA), formed last year when stock market regulators from NASD and NYSE merged, issued an investor alert in May about 401(k) debit cards, saying the risks ranged from a reduced savings nest egg to a possible loan default.
Democrat Sen. Herb Kohl of Wisconsin said that the opposition is to companies seeking to capitalize on tightened access to consumer credit. “After retreating over the last few years, companies looking to raid Americans’ 401(k) accounts are making a comeback,” Schumer said in a statement. Banc One Corp briefly tested a 401(k) credit card in 1996, but the product hit resistance in Congress and did not last long. “A decade ago, the mere idea of this legislation was enough to get companies to abandon this reckless practice,” Schumer said. “This time, we want to push this bill all the way to becoming law.”
Funded by contributions made by employees, a 401K plan is a way to save for retirement. Contributions are made prior to taxes being taken of the employees paycheck and the fund grows tax-free. Consumers have had limited early access to their 401(k) funds through low-interest loans or hardship withdrawals. Federal rules generally allow you to borrow up to 50 percent of your vested 401(k) account balance or $50,000, whichever is less.
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