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.

Roth If You Can’t Match

A few weeks ago, we wrote about checking to see if your employer offers matching contributions to your 401K and, if they do, making sure that you start contributing.  The economic downturn, however, has led many employers to cut benefits, and matching contributions have been frequently one of the first ones to go.  If you find yourself in this situation, stop contributing to your 401K account immediately.  Instead, open a Roth account and start saving towards retirement there.  Click here to learn the difference between these two accounts.

Like your 401K , your investment options for Roth range from CDs to bonds to stocks.  You are only limited by the investment firm you choose.  Companies, such as Fidelity, Vanguard, and T. Rowe Price, have fund options that do not charge sales fees or commission.  There might be, however, initial deposit requirements ($3,000 at Vanguard), minimum monthly contribution requirements ($200 per month at Fidelity) and annual fees if the account is below a certain threshold ($10 a year at T. Rowe Price for mutual fund accounts with balances of less than $5,000).

As for the 401K account, you have the option to roll it over to a traditional or Roth IRA when you terminate employment.  But for now, just let the money sit and grow.  While these retirement funds have been hit hard, the economy is rebounding and good news is all around.  Just this quarter, my account actually accrued earnings!  Soon enough yours should too.