Tapping 401(k) with a Credit Card

A financial services company offers an innovative program that streamlines the 401(k) loan, just in case you're hit with a financial emergency.

Life is fraught with unpredictability. No one predicted Britney Spears would shave her head, or that the Memphis Grizzlies would trade Pau Gasol to the Lakers. When unpredictable circumstances work their way into your life, you may need to resort to unconventional methods to get by. One such method is a little plastic card that gives you access to your 401(k) funds.

A loan from your 401(k) plan is serious business. Taking money from the plan reduces your earnings power, and reducing your earnings power may lead to tens of thousands of dollars in lost income over time. Plus. you have to deal with some rigid repayment demands, such as the potential for five years of payroll deductions.

Still, there are times when a 401(k) loan is your best, or only, option. Recognizing this, a company by the name of Reserve Solutions is promoting an alternative to the traditional 401(k) loan. This alternative is called ReservePlus, and it incorporates some intriguing, borrower-friendly features.

Here's an overview of how ReservePlus works. To begin with, you must apply for the debt through the company plan. Once your loan is approved, the amount you request is taken out of the 401(k) and invested in a low-risk, interest-bearing deposit account. You're then issued a plastic card that's linked to the funds. That card can be used at designated ATMs and participating merchants around the country. In essence, it's a self-funded credit card.

Advantages

· Higher potential earnings. A traditional 401(k) loan deposits a lump sum into your checking account. But ReservePlus puts the funds in a money market, where it earns interest until you spend it. Plus, keeping the money out of your checking account may lower the likelihood that you'll spend all of it. According to Reserve Solutions, the average ReservePlus borrower doesn't actually use the full amount of money requested.

· Flexible repayment. A traditional 401(k) loan is repaid through a series of regular payroll deductions that don't allow for partial prepayments. If you lose your job, you have to pay the entire amount back within three months. Repayment of a ReservePlus loan is managed differently. Payments can be made through online bill pay or paper checks, and a change in employment doesn't prompt a repayment demand. If you feel like paying a little extra here and there, you have the flexibility to do so.

Disadvantages

· Cost. The interest rate is slightly higher than that of a traditional 401(k) loan, and Reserve Solutions takes a cut to cover administrative fees.

While ReservePlus streamlines the 401(k) loan, it should not streamline your decision-making. Before you ask for the little plastic card, make sure it's the right thing to do. Yes, life can be unpredictable-but you still have to proceed with discipline.