IRA Debit Cards Offer Convenience With Hefty Fees

Here’s how to decide if the new IRA debit card is right for you.

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The highly criticized 401(k) debit card now welcomes a new member of the family: the IRA debit card. This new form of plastic also allows quick access to your retirement stash but, unlike the 401(k) debit card, this card prohibits loans from retirement accounts.

The IRA debit card, launched yesterday by the Entrust Group, an administrator of self-directed retirement plans, allows cardholders to take required minimum distributions from their retirement accounts or purchase IRA assets. But, like any financial product, fine print applies. Here are some things to consider about the IRA debit card.

Watch out for fees. The card comes with hefty fees, including a $75 annual administration charge, a $20 monthly maintenance fee, and $5 per transaction. “Make sure this convenience is worth paying those fees,” says John Gannon, senior vice president for investor education for the Financial Industry Regulatory Authority (FINRA), a nongovernmental securities industry regulator. Even without this new card, “you can withdraw money from your IRA and put it in your checking account and have the services of that checking account at no cost to you.”

File paperwork promptly. All IRA Card transactions are considered distributions unless proven otherwise. “I had to buy a water heater for one of my [investment] properties, so I went to Home Depot and used my debit card and submitted the proper documentation,” says Hugh Bromma, the CEO of Entrust. Account holders have 30 calendar days after the transaction to submit documentation proving that the expenditure was for an IRA asset before Entrust reports the withdrawal to the IRS for tax purposes. The paperwork cannot be submitted online because original signatures are needed, Bromma says.

Avoid prohibited transactions. The owners of self-directed IRAs generally get a lot of flexibility in the types of assets they can hold inside the IRA. But if your purchase is determined not to be a legitimate investment expense or asset purchase, then the amount is considered a distribution and may be taxed and, if the account holder is under age 59½, may result in an additional 10 percent early withdrawal penalty. An example of a prohibited transaction is purchasing real estate you will live in, such as a second home.

Monitor your spending. IRA cards allow you to tap your nest egg to pay for goods or services wherever Visa is accepted or to make ATM withdrawals. “I was happy to have a wonderful dinner in Paris on my IRA card. I even used it on a ship,” says Bromma, who is “at the age where I can take [penalty-free] distributions.” Cardholders are limited to funds that have been transferred to their linked IRA Card checking account and any transaction above the account balance is declined. But critics say IRA and 401(k) debit cards make it too easy to access retirement funds that should remain locked away until retirement. “Most people are using their IRA in retirement to cover basic living expenses, and they should make sure that they manage their money wisely,” says Gannon. “When you use plastic, you are likely to spend more money than you would if you used cash.”

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