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Borrowing From 457

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I am interested in opening a 457 mostly because I heard you could borrow from it if you really need the money. I think having access to one's own money would encourage people to contribute more to retirement.


Where can I find the specific rules on this? How is it different from this 401(k) credit card I've heard about?

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First, only GOVERNMENTAL Section 457 plans are permitted to offer loans to participants. A plan offered by a school district would qualify.


Second, rules permitting loans to 457 plans are relatively new, and are still only PROPOSED regulations, though they have the force of law until final regulations come out. And the problem is that the proposed regulations for 457 loans are more stringent than those for 403(b) or 401(k) plans. The 457 rules include a "facts and circumstances" test that requires that the loan be in the best interest of the participant. Since it is not entirely clear what this means, many 457 plans have not yet been amended to permit loans, and/or the product providers have not agreed to administer the loans. It is possible that the final regulations will eliminate or further clarify the "facts and circumstances" test. If I were a plan administrator, I would probably be waiting for that, and not authorizing any loans in the meantime.


So we are in the midst of a gray period where loans are technically permitted, but no one is entirely clear how to do it without getting into trouble. So there is a good chance you will have to wait a bit longer.


I haven't heard of a "401(k) credit card" and can't imagine such a thing being permitted for use by active employees. Once you are eligible to withdraw funds from your plan, however, the plan administrators can let you have the money in any fashion that is agreeable to the parties, so perhaps a credit card type of arrangement is being offered by some plans for account holders who are retired or otherwise eligible for withdrawals.


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Since my previous reply (above) I have come upon some information about the 401(k) credit card idea. Apparently this IS intended to allow a limited amount of borrowing by an active employee. I also gather that it has not received regulatory approval yet, and my own impression remains that it is well out of bounds of what Congress intended, and that approval should probably not be given. But the people who are talking about it are talking as if approval is indeed expected, so my skepticism may well prove to be misplaced.


To bring this back to the 457 question, a credit-card approach would clearly go directly against the proposed 457 loan regulations that require a "facts and circumstances" test, so that even if the credit card idea ends up being approved for 401(k) plans, and implicitly for 403(b) plans, since they follow the same rules, this would probably not extent to 457 plans, at least not until the current proposed regulations are revised.


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I've heard rumors about a so-called 401(k) credit card. It amounts to a card by which plan participants can automatically borrow against their 401(k) plan without going through a formal loan process. There are limits on the amount of the loan (I've heard that the upper limit amount is $10,000). And, repayments are required... if there are no repayments for a three month period, it triggers a distribution which is subject to the 10% penalty.


I'm not sure how this concept avoids the requirement that a loan be evidenced by an enforcable agreement. Perhaps there's an agreement that the participant signs in order to secure the 401(k) credit card that covers all of the legal requirements.


It sounds like a nice way to entice plan participation. However, I hope that it doesn't lead to overuse, leaving participants in debt and without retirement savings.


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Guest Sierra

Here are some more of the details. Notice that the issuer is one of our usual suspects, ING.





Credit Card Access to 401(k) Savings on the Way



AccountingWEB.com - October 26, 2004 -


Will convenient access to savings in 401(k) plans encourage workers to put away more money for their future or tempt them to drain their retirement accounts?

The debate over that question has raged for nearly 25 years, but the various theories will be tested in the real world soon. A new 401(k) credit card is set to be unveiled




today at a financial conference in Washington, D.C. After financial services company ING receives final regulatory approval, the new card will be introduced to employers and 401(k) plan participants, who will be able to borrow their own money without going through a complicated loan process.


As reported by the Washington Post, the new 401(k) credit card will allow workers to borrow no more than 40 percent of the money in the account, or up to $10,000, whichever is smaller. The card would carry a $50 annual fee. Repayment would be made monthly over a maximum of four years.


Workers would be considered delinquent if they missed three months of payments. That would trigger a conversion from a credit card loan to an early 401(k) withdrawal, which carries a 10 percent tax penalty under IRS rules.


The idea is the brainchild of Boston inventor Francis Vitagliano, 55, and MIT economics professor Franco Modigliani, who won the 1985 Nobel Prize in Economics and died last year at age 85.


The men, who started working on the 401(k) credit card in 1980, believed that workers could borrow their 401(k) money at a much lower cost than using credit cards with high interest rates. They also contended that younger employees would be encouraged to sock away more money for retirement if they knew it could be used as needed.


The men patented the card idea and tried unsuccessfully for many years to sell it to banks and credit card companies. They also turned down up to $10 million to sell their patent, instead deciding to continue their hands-on involvement and potentially make more money from royalties.


"The journey has been fascinating," Vitagliano said. "If all we really wanted was to make money, we would have taken the money we invested in getting the patent and bought a fast-food franchise. Our commitment has been to the value of the invention and that it be implemented properly."


Their idea has some powerful critics and supporters.


Lawrence H. Summers, president of Harvard University and former secretary of the Treasury, told the Post recently, "Anything that encourages individuals to establish separate accounts for their saving is likely to increase personal saving and preparation for retirement. This is important for individuals as life expectancies increase and retirement ages decrease."


David Certner, director of federal policy for AARP, however said, “This just sends absolutely the wrong message about savings and especially about retirement savings. This is just one more example of allowing people to cash out."


One thing is certain. U.S. Rep. Earl Pomeroy, D-N.D., a member of the House Ways and Means Committee, said he will closely watch the card's introduction.


"If this is a tightly targeted pilot - that is, indeed a legitimate test of the theory 'Does this help or hurt retirement savings?' - maybe there is some merit in giving it a real-world experiment," Pomeroy said.


He said he fears that easy access to retirement funds will simply mean more debt, not more retirement savings. "The easier the access, the faster the money goes away," Pomeroy said. "That has yet to be disproven. I don't believe there is any significant statistical evidence supporting the view that you facilitate savings by making it easier to spend.”








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