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Continuing from my last post on ReservePlus (401k loan with debit card), let me share the pros and cons of going for such a program.

Pros:
Once you terminate your old job and switch over to a new employer,

• You need not pay back the loan within a short period of 2 months (as in traditional 401k loan).
• You can repay the 401k loan within 5 years of taking it regardless of whether you are employed or unemployed.
• You can avoid paying huge taxes and early withdrawal penalties.

Cons:

• With a debit card, you get easy access to money therefore chances are you can be tempted to borrow unnecessarily.

• Interest rates on ReservePlus loans being 2.9% higher than the Prime Rate, which is even higher than that of traditional loans, chances of default are higher.
• There is no payroll withholding option to repay the ReservePlus loan. Such option can reduce the number of defaults.

There is no doubt that a retirement plan with the option to provide loan increases plan participation. However, one should go for a 401k loan only when there are no options available or else it may lead to lower retirement savings.

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