Saving for Retirement through a Credit Card? Not So Fast.

Two weeks ago, the WSJ published an article on credit cards that offer cash back or points that can be used to fund your retirement or another investment account.  As the article explains:

Instead of redeeming earned points for the typical airline tickets or gift cards, users of these cards receive cash that they can then deposit into an individual retirement account or another investment or savings account.

This seems like a reasonable deal, and may in fact be useful to those who need some help remembering to move some of their savings into their retirement account.  But beware of the conditions and reward rates.  Here, we review the cards mentioned in the WSJ article:

  • Ameriprise: Ameriprise has 5 credit cards – 2 for only members of its Achiever Circle Elite program.  Its rewards program is like many others, awarding one point per dollar spent on most purchases (and varying bonuses depending on the card).  Points can then be redeemed for a range of things, including travel, gift cards, and funding into an Ameriprise account, including savings and investment accounts.  Points for funding Ameriprise accounts can only be redeemed in increments of 10,000, which are converted into $150 – effectively, a 1.5% reward return.  Two of the cards have no annual fee, while the fees for the other three cards range from $125 to $450 after the first year.
  • Edward Jones: The rewards program for the Edward Jones Personal Credit Card is very similar to Ameriprise’s, offering a variety of options for which points can be redeemed.  One of them is funding into an Edward Jones account, such as an IRA or 529.  However, points can also be redeemed for cash at exactly the same point exchange rate.  For example, for 2,500 points, you can get either $12.50 in your account or as a cash reward check, and for 50,000 points, you can get $500 in either form too.  The reward rate is also relatively low, as it ranges from 0.5% when redeeming 2,500 points to just 1% for redeeming 50,000 points.  There is no annual fee for this card.
  • Fidelity Investments: Fidelity offers 4 different credit cards, all of which transfer your rewards straight into your Fidelity account.  There are 3 American Express options, which post 2% of the value of your purchases into a Fidelity Investment, IRA, or 529 accounts, respectively.  The Visa card, on the other hand, gives only 1.5% on the first $15,000 you spend per year on the card, and 2% thereafter.  All 4 cards do not have annual fees.

The WSJ article also warns about interest rates, but even readers who pay their balances in full every month should think carefully before signing up for one of these retirement or investment cards.  These cards require that rewards be deposited into an account opened at their respective financial  institutions.  Further, their reward rates are quite low, and you are likely better off getting a good cash back card – such as Discover or CitiForward – and, if you want, depositing some or all of your returns into an investment account or IRA of your choice.

Tax-Deferred Plans for the Self-Employed: sometimes it is nice just knowing you have the option

In general, we believe that, if your employer does not match your contributions to a 401(k), a Roth IRA is a better option.  It can move with you as you switch employers and grows tax-free.  Whether you are employed or self-employed, you may open and contribute to a Roth IRA as long as you have an income and your MAGI is below $120,000 if you are single or $176,000 if married and filing jointly.  But if you are self-employed, you should know that you are not barred from having a 401(k) as well, just like individuals with employers – you have the option of having a tax-deferred retirement plan though a SEP IRA or a Keogh plan.

SEP IRAs and Keogh plans are designed for small businesses, and for the self-employed they work basically the same way.  You can set them up through a financial institution, and your maximum contribution depends on your net earnings through self-employment.  As your contributions will be tax-deferred, you may deduct a portion of them in your income taxes using a worksheet that considers your income as well as the deduction you already get for your self-employment tax (check out the IRS publication 590 to learn more ).

While a Roth IRA may be easier to set up and manage, knowing that you can also have a 401(k) as a self-employed individual may nonetheless come in handy if you make or expect to make more than the income limit for contribution to a Roth IRA, or if you would like to contribute more to retirement than the $5,000 allowed under the IRA plans.

You Can’t Afford Not to Match

By “match,” I am not talking about your work outfit (although that goes without saying). I am talking about your employer’s matching contributions to your 401K.  401K  (so-called because of the section of the Internal Revenue Code that governs such plans) is a type of retirement plan that allows individuals to contribute pre-tax dollars to a fund and have the savings grow tax-deferred until withdrawn at retirement.  Most recent graduates do not get paid enough as it is, so I am always quite surprised to hear about people who did not even bother to find out if their employers offer matching contributions. Hello? It is free money!

Leaving aside the arguments that recent graduates are too young or too poor to save for retirement, let’s talk numbers. For example, let’s say you make $35,000 a year and your employer offers a matching contribution to your 401K at a rate of 50 cents for every dollar you contribute, up to 6% of your salary. This means if you put in $1,000 for your 401K ( less than $20 each week), your employer will just give you another $500. If you make the maximum contribution of $2,100, your employer will give you more than $1,000 in free money. Some companies match at a higher rate and/or set even higher matching ceilings. So while it may be hard, you should really figure out a way to put aside enough money to maximize your matched contribution. In the end, you will be receiving free money from your employer and it will all be growing exponentially in an account somewhere.

Unfortunately, in this economy, many employers are scaling back their costs by cutting out the matching contribution benefit, in which case you should no longer contribute to your firm’s 401K but set up a Roth IRA (more in the next post).

The other major component of matching contributions is how long it will take for them to be 100% vested – meaning they belong to you completely even when you quit. Some firms, such as mine, are 100% vested when they are matched; others require that you work for a few years with them. If you are not sure how long you will stay at your current company, then you should also consider opening your retirement account elsewhere.

Bottom line – this is a HUGE benefit that your employer is providing and you would be crazy not to cash in on it.

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