Audio: 401(k) debit cards may be risky

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In these tight times, many are contemplating tapping their 401(k) savings. Now a company is offering a debit card to make it easy. Is that a good idea? I’m Kristin Arnold with your Personal Finance Minute.

The program is called ReservePlus, and here’s how it works: A 401(k) participant sets an amount for ReservePlus to place in an interest-bearing money market account in a 401(k) plan. The borrower is issued a Visa-branded debit card to withdraw money from this account. When a withdrawal is made, a loan is established under IRS rules for 401(k) loans.

This type of loan is significantly different from a typical 401(k) loan because it has complex terms and fees and variable interest rates. With a standard 401(k) loan, interest charges are plowed back into a 401(k) fund when the loan is paid off. With the debit card loan, ReservePlus keeps the added interest. And since it’s a variable interest rate, you don’t know for sure how much the loan will cost.

If you are contemplating this plan, be sure you study all of the terms and fees before tapping your savings.

For more investing advice, visit I’m Kristin Arnold.