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Borrowing from your Retirement Plan:
Debit Cards

The ability to borrow from yourself, tapping into savings that you have accumulated in your 401(k) may seem like something that is designed for emergency use only. As I suggested in an early article on the topic, the practice of loaning yourself cash when certain problems arise such as layoffs or medical emergencies is good only if you intend to pay yourself back. This "UOU" can be fraught with dangers however and with the introduction of the debit card, those accounts now have become much easier to tap.

When you do need to borrow from those retirement savings accounts, known as defined contribution plans, the process can often be difficult. Instead, with a 401(k) debit card, the account is always available - up to $50,000 or 50% of the balance. 

The difference between the transaction done with a debit card and one that is formally applied for is time. In many instances, the 401(k) loan will need to be repaid within ninety days unless it is used for such problems as a medical emergency, first time home purchases or college. With a debit card although, the repayment window is extended to five years per transaction. The interest rate, usually around 8% may be better than most savers might get outside of the plan.

If you can, avoid the temptation. The losses may seem minimal interms of interest rate but when you begin to calculate the lost opportunity of growing that money, the possibility that you may be foregoing the matching funds your employers deposits and taking the loan, the losses could amount to upwards of 25% of what that money could have represented.

If you have the loan beyond the time limits, the money could also be taxed as income. The one advantage of having a debit card attached to such an account is the easy access you have to the money managed by your former employer should you be laid off. That doesn't mean you should use it. Rolling it over to another account such as a tax-deferred IRA is the best option.