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Wouldn't it be nice if consumers could avoid costly credit card balances by financing their own debt? A new retirement credit card aims to let retirement plan- holders do just that. The concept is simple--employees with 401(k) savings plans purchase a retirement credit card for a $50 annual fee. The card then enables them to borrow up to $10,000, or 40 percent of the money in their retirement accounts--whichever is less--for any type of purchase they want to make. Cardholders pay relatively modest interest--prime plus 2.9 percent--and receive monthly statements like a regular credit card. Ideally, the card would boost 401(k) plan participation and enable consumers to replace high-interest credit cards with a more economical card.
But misuse would offset that benefit. "The risk is that people don't replace other credit cards; they just add [this one] and get deeper into debt," says Alicia H. Munnell, director of the Center for Retirement Research at Boston College. Such overextension carries a hefty penalty: Employees who fall three full months behind on payments lose the use of the card, and the balance of the loan is converted to a 401(k) withdrawal subject to the resulting income tax and penalties.
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