Get fast cash from your retirement plan! Turn your 401 into a revolving credit line!
What sounds like a sales pitch on late-night TV is actually the brainchild of Nobel-prize-winning economist Franco Modigliani, who has patented the idea of a credit card that would tap the funds in your 401 plan - sort of a retirement-equity loan.Ohio-based Banc One has bought exclusive rights to the card. But you won't be getting one anytime soon because employers aren't buying the idea, says Richard Koski of Buck Consultants, who counsels large companies on 401 plans.
"They don't want participants to view their retirement plan as a kitty you can use to charge dinner," Koski says.
Furthermore, plan loans are repaid through payroll deductions, and a 401 credit card would be "every payroll manager's nightmare," says one benefits consultant, because the loan balance would change from month to month.
And plan sponsors feel they've already gone far enough in giving employees quick 401 access, sometimes via 24-hour loan hot-lines.
Currently, most 401 plans permit you to borrow half of your balance, up to a maximum loan of $50,000, at rates that currently run one point above prime. The interest is not deductible, and the loan
must be paid back within five years unless it's used to buy a house.
The Labor Department has given Banc One the go-ahead to treat charges to a 401 credit card as a loan. But 401 expert Ted Benna suspects the idea still won't pass muster in Washington.
"Treasury will question whether this is an abuse of the tax subsidy that allows people to build funds for retirement," Benna says.
Also, you could be burned if you quit or lose your job while the loan is outstanding. The debt is considered a distribution from the plan, which means the money is taxable income to you and, if you're under age 55, subject to a 10 percent penalty.
Any type of 401 loan should be considered only as a last resort. That money is always available if you really need it, but in the long run you're better off tapping your other resources first.