Retirement plan loans are risky business

By Malcom Berko

Published: September 7, 2008

Dear Mr. Berko: Over a year ago, the employees of our company and I received debit/credit cards that let us take money from our 401(k) accounts. This is a great thing because instead of paying 22 percent or more in interest plus penalties and charges to Visa or Master Card, we would only pay 10 percent interest. What's more, what interest we paid would go to our 401(k) account because we had borrowed the money from ourselves. Because our home-equity loan was up to the limit, we used $23,000 from my 401(k) last year to purchase a remodeled kitchen for my wife and a home entertainment center for me.

Well, I got laid off after 16 years with the company. Consequently, I can't use the company payroll deduction plan, as we had planned, to repay the 401(k) loan. And because I can't afford to repay the loan, I will have to pay an early withdrawal penalty to the IRS, federal and state income taxes, and back interest.

Is there any government program to help married family men like me to pay back our 401(k) retirement plan loans because the bad economy caused us to lose our jobs?

And if there isn't, please tell me your best opinion on Jesse Webb who advertises how to make up to 30,000 percent by buying stocks selling for a penny or a nickel. Even if I could make 10,000 percent I'd be happy and I would pay off my 401(k) loan.

He also has an options course in which he says a California investor made $18 billion last year, that a professional athlete made $16 million and a golf caddy made $100,000 every month for 6 straight years. I'm willing to borrow the money from an uncle to take these courses if you think they will work. Please answer me because I need your help immediately.

S.S., Durham, N.C.

Dear S.S.: Some readers might not know that a 401(k) account is an employer-sponsored retirement plan to which the employee and, often, the employer contribute a portion of their incomes. Meanwhile, taxes and earnings on that income are deferred until it is withdrawn, usually after age 59½. If funds are withdrawn before 59½, there can be some pretty heavy penalties. If you borrow from the plan and leave the sponsoring company, your loan must be paid back within 60 days or the IRS will ding you till you're deaf or your head explodes.

It seems that quite a few corporations offer debit/credit cards with ATM accessibility allowing employees to borrow up to 50 percent of their 401(k) balance with the provision that the loan is repaid with payroll deductions over 60 months. Well, that is a sweet source of new blood money for the slave traders in the credit card industry, who rank lower on my approval scale than serial killers and pedophiles. "A sucker is born every minute” P.T. Barnum declared, "and 60 credit cards are issued every hour to make sure no sucker is spared.” I guess the American worker is the only consumer in the world more stupid than an Arctic Eskimo who buys a refrigerator/freezer.

Meanwhile, you asked if the government has a program to help married family men to repay their 401(k) loans. My answer is not yet, but I'm certain that Congress is working on one. This credit card flim-flam by ReservePlus has been operational for more than three years, and Congress has no choice but to look after millions of people like you and your wife who're incapable of making sensible financial decisions for their retirement futures. Your profligacy speaks to the failure of our educational system in teaching you good financial manners.

Jesse Webb? Don't make me laugh. His claims of 30,000 percent returns should set off alarms like a thousand dental drills digging in your brainpan. Webb is a cherubic-faced lad who could probably sweet talk Attila the Hun off his horse. But if you can scrape up a couple thousand to buy his Microcap Stock and his Opt Trading Programs, then go ahead and do it. Now I'm not going to waste any more ink on Webb, so I'll just give you the AARP version: "He tends to exaggerate a little bit.”

But not to worry, if your losses are significant I'm sure Congress will pass legislation to assist married family men like you who lost money following Webb's recommendations.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@comcast.net

Comments