First off, this is not some gimmicky blog post trying to sell you a credit card or sign you up for any product. To further dispel that notion, rest assured I have no professional affiliation with any of the products mentioned below. I’m simply sharing a strategy that I use to effectively get paid for using a credit card, and have those dollars invest into a Roth IRA where future qualified earnings will be 100% free from taxation. The best thing about this strategy? Anyone who is working and has earned income can use it1.
Here’s How It Works
I’m sure everyone reading this has seen credit cards offering reward programs that can be used to purchase goods from a store or be received in the form of cashback. These rewards typically range from 1-4% depending on what items are purchased with the card. If you’re not familiar with what I’m talking about, just do a Google search for “best credit cards of 2019” to see what offers are out there. They sell you on a low or zero-dollar annual fee, a bonus when you spend more in the first few months, and maybe even a payout of a couple of hundred dollars to open the line of credit. So how can you use these programs to generate tax-free earnings?
The card I use specifically is the Fidelity Rewards Visa Signature Card. It pays 2% cashback on eligible purchases (which just means you have to be in good standing with the company) and you can have the rewards pay directly into your Roth IRA account. There are no annual fees, so you can open this card with zero cost… as long as you pay your balance in full every month. In doing so, you get 2% cashback without paying a dime to the company. And here’s the thing, you don’t have to use the Fidelity card for this strategy. You can use any card that has the option to pay you cash, and then you personally dedicate that money towards a savings or retirement account of your choice. The nice thing about the Fidelity card is the automation that makes this savings hack easy and repeatable. You just set it and forget it. Out of sight, out of mind. But how much are we talking here?
The Geeky Math
It’s no secret that Americans struggle to save enough money for financial goals. In fact, a recent study found that, “40.6 percent of all U.S. households where the head of the household is between 35 and 64, inclusive, are projected to run short of money in retirement” (VanDerhei, 2019). We all have that little voice in our head that tells us we should be saving more, but let’s face it, that’s hard to do. So, any strategy you employ to save little amounts can help avoid a shortfall situation down the road. Also, check out the power of compounding returns on 2%. If you spend $6,000 per month and can charge 90% on a card, 2% cashback pays you $108 per month and just under $1,300 per year. This amount contributed to a Roth IRA that earns 10% per year over 30 years, compounds to an astounding account value of $213,8422. If you wait until age 59.5 and have had the Roth IRA account for at least 5 years, all of those earnings are 100% tax-free.
This one small life change and strategy can transform the question in retirement from,
“Oops, we’re short on savings, how can we downsize our life?”
to,
“Where should we travel next?”
And by the way, the average annual return on the S&P 500 since its inception in 1926 is approximately 10%. But remember, good financial planning comes with proper self-discipline.
Be Mindful of How you Use Credit
If you struggle to pay off your card in full every month, this strategy is not for you. The interest charged by not paying the monthly balance negates the benefits of the cash paid back to you. Credit cards charge such high rates of interest, that if you are not able to pay the balance in full each month, I would steer clear of them completely and instead use a debit card from your bank. Utilizing this strategy allows you to start working on building the discipline to keep spending within your monthly income limit.
If this is not an issue for you, then this strategy could be a great arrow in your quiver to reach savings goals. And while this strategy is useful for anyone with savings needs, I especially encourage all millennials or anyone with more than 5-years to invest to start using this method of built in savings and investing.
If you found the information in this blog useful, subscribe at the bottom of my page to be notified first of future content releases.
Stevie Heitzmann is the CEO of Altruistic Investing LLC as well as a financial advisor at Bauer Wealth Management LLC, both investment advisory firms based in Colorado Springs, CO. www.altruisticinvesting.com Altruistic Investing LLC is a Registered Investment Advisor (Firm CRD# 289016 / SEC#801-110892) with the Securities and Exchange Commission. Bauer Wealth Management LLC is registered with the Colorado Division of Securities (CRD#: 152977/SEC#: 801-71090)
This article does not represent an investment recommendation or endorsement of any kind. Please consult with your advisor regarding your specific situation. Investing in securities does involve risk of loss that clients should be prepared to bear. The risks can range from failing to keep pace with inflation to losing some or all of the money you invest.
References
Kagan, Julia. “Roth IRA Definition.” Investopedia, Investopedia, 19 June 2019, www.investopedia.com/terms/r/rothira.asp.
Fidelity Reward Visa Signature Card
https://www.fidelity.com/cash-management/visa-signature-card
VanDerhei, Jack. “Retirement Savings Shortfalls: Evidence From EBRI’s 2019 Retirement Security Projection Model®.” Retirement Savings Shortfalls: Evidence From EBRI’s 2019 Retirement Security Projection Model®, 7 Mar. 2019, www.ebri.org/content/retirement-savings-shortfalls-evidence-from-ebri-s-2019-retirement-security-projection-model.
Maverick, J.B. “What Is the Average Annual Return for the S&P 500?” Investopedia, Investopedia, 21 May 2019, www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp.
- Roth IRA Contributions are subject to earned income limitations. Please check with your investment or tax advisor concerning your eligibility.
- Assumes a level payment of $1,300 per year, compounded annually at a rate of 10%. Adjusting for inflation at 2.5% changes the value to $130,032.