The 401(k) debit card is a new product being offered by Reserve Solutions that allow participants in employer-sponsored retirement plans such as 401(k)s to access their money while still employed and under age 59 1/2. Traditionally, these retirement plans required an active employee to reach age 59 1/2, take a loan, or qualify for a hardship in order to access their money. This debit card acts as a loan by allowing participants to access their money as needed.
The 401(k) debit card has characteristics of both a debit and credit card. It works as a debit card in a sense because you are accessing a set amount of your own money that is in the account. But borrowing from this balance actually works like a credit card since the borrower is really just taking a loan and has to make payments to repay the loan, including interest.
When a participant requests a 401(k) debit card, a limit will be set based on how much they have saved in their account and vested balance according to the plan's provisions. This amount is then moved into a separate money market account that earns interest while the funds sit ready and available for withdrawal by using the card. Once the money is approved and placed into this account, it can be treated as any debit or credit card to make purchases.
Just like a traditional 401(k) loan, the borrower will have to pay interest on the money that is borrowed. The most common method for determining the interest rate is for the provider to tie it to the Prime rate. The interest rate the participant pays may be set at, or close to the Prime rate, depending on plan provisions. Interest will be calculated and applied to the outstanding balance like a credit card. The monthly bill will include a minimum payment amount, which will be applied to the principal and interest.
In addition to interest, the 401(k) debit cards have other fees associated with them. There may be an origination fee, an annual fee for the card, and a $2.00 cash advance fee every time you use your card at an ATM to withdraw funds.
How 401(k) Debit Cards Work
The 401(k) debit card has characteristics of both a debit and credit card. It works as a debit card in a sense because you are accessing a set amount of your own money that is in the account. But borrowing from this balance actually works like a credit card since the borrower is really just taking a loan and has to make payments to repay the loan, including interest.
When a participant requests a 401(k) debit card, a limit will be set based on how much they have saved in their account and vested balance according to the plan's provisions. This amount is then moved into a separate money market account that earns interest while the funds sit ready and available for withdrawal by using the card. Once the money is approved and placed into this account, it can be treated as any debit or credit card to make purchases.
Interest and Fees
Just like a traditional 401(k) loan, the borrower will have to pay interest on the money that is borrowed. The most common method for determining the interest rate is for the provider to tie it to the Prime rate. The interest rate the participant pays may be set at, or close to the Prime rate, depending on plan provisions. Interest will be calculated and applied to the outstanding balance like a credit card. The monthly bill will include a minimum payment amount, which will be applied to the principal and interest.
In addition to interest, the 401(k) debit cards have other fees associated with them. There may be an origination fee, an annual fee for the card, and a $2.00 cash advance fee every time you use your card at an ATM to withdraw funds.
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