How to Save More With a Retirement Focused Cash Back Credit Card

Mar 29, 2017 | Be First to Comment!

As pensions become less common, many American workers are saving for retirement with individual or employer-sponsored retirement accounts, such as Individual Retirement Accounts (IRA) and 401(k)s. However, many people don’t, or can’t, put enough money into these accounts to fund their retirement.

The Economic Policy Institute’s (EPI) The State of American Retirement report highlights the lack of retirement savings among American families, particularly families of color and low-income families. If you’re struggling to find extra room in your budget for retirement savings you’re certainly not alone – the EPI found nearly half of all households have no retirement savings.

To get started, or to increase your savings, consider putting aside the rewards you earn from a cash-back credit card. Some cards even link directly to investment or retirement accounts, including the new Fidelity Rewards Visa Signature.

Fidelity Rewards Visa Signature for Retirement Savings

With the Fidelity Rewards Visa Signature, you can earn 2 percent cash back on every purchase, and you can deposit the earnings directly into an eligible Fidelity brokerage or retirement account.

It’s a simple rewards program to use and track. There aren’t any spending categories to remember, there’s no limit to the rewards you can earn, and the rewards (which you earn as points) don’t expire. You can spread out your rewards and deposit them into up to five different eligible accounts, including other people’s eligible Fidelity accounts.

The card doesn’t have an annual fee.

You can cash out your rewards points in several ways. You can choose to automatically deposit the rewards each month, or you could hold onto your points and choose when to deposit them. With both options, you’ll need a minimum 5,000 points ($50 worth).

Starting at 2,500 points, they are also redeemable for gift cards, statement credits, merchandise, and travel rewards. However, by using the cash-back rewards to grow your retirement savings you could greatly increase their value.

Compare the additional savings that could come from depositing the cash-back rewards into a tax-advantaged retirement account, and how making an additional contribution of your own can increase your savings.

Enter Table Name here

Contributing $20 in rewards each month (earned from spending $1,000). Contributing $100 each month. Contributing $100, plus $20 in rewards each month.
1 year $249 $1,246 $1,496
5 years $1,440 $7,201 $8,641
10 years $3,482 $17,409 $20,891
15 years $6,376 $31,881 $38,257
20 years $10,479 $52,397 $62,876
25 years $16,296 $81,480 $97,776

Assumes no funds are withdrawn, deposits are made at the beginning of each month, and you earn a monthly compounding 7-percent return on your investments. 

Choosing a Retirement Account

You’ll need to open an eligible Fidelity account and link your card before you can deposit the rewards. There are several types of eligible accounts, including taxable brokerage accounts and tax-advantaged college-savings accounts. However, if you intend to use the rewards to increase your retirement savings, a Traditional or Roth IRA may be the best two options to consider. At Fidelity, there’s no fee to open or maintain either type of account, and there’s no minimum account balance requirement.

Both types of retirement accounts offer tax advantages to savers, but there are some differences between the two.

  • Traditional IRA. The money you put into a Traditional IRA is post-tax money, meaning you can deduct your contributions from your income for the year. However, you’ll need to pay income taxes on the money you withdraw from the account in the future.To contribute to a Traditional IRA, you’ll need to be younger than 72-and-a-half years old. You’ll also need to take a minimum required distribution (RMD) from the account once you reach 72-and-a-half years old.
  • Roth IRA. Contributions to Roth IRAs aren’t tax deductible, but both your contributions and the earnings from your investments can be withdrawn tax-free later.There’s no age requirement for making contributions and no RMD. Unlike with Traditional IRAs, Roth IRAs have income requirements. You may only be able to make a partial contribution, or none at all, if you’re income as a single filer is over $117,000 in 2016.

You can also rollover, or transfer, an employer-sponsored retirement account, such as a 401(k), from an old employer into a Fidelity Traditional or Roth IRA.

With both types of IRAs, you can only contribute as much as you earned during the year and there’s a maximum contribution limit of $5,500 during 2016 ($6,500 if you’re 50 or older). The contribution limit is tied to the cost of living, and may increase or decrease in the future.

The cash-back rewards from the Fidelity Rewards Visa count towards your contributions if they’re deposited into an IRA. If you accidently go over the year’s limit, you’ll need to pay a 6-percent tax on the excess contributions each year until you withdraw them.

You may have to pay a 10-percent penalty for withdrawing earnings from either type of account before you reach 59-and-a-half years old. With Traditional IRAs, this applies to your contribution as well, but with Roth IRAs you can withdraw your contribution penalty-free at any time. There are also some penalty-free exceptions, if you become disabled or use the money for higher-education expenses for example.

Easily Increase Your Savings

With it’s simple to use and fee-free rewards program, you can use the Fidelity Rewards Visa Signature to help grow your retirement savings. Although 2-percent back may not seem like a lot, when you put the rewards into a retirement account and earn compound interest on your savings it starts to add up. By contributing $100 of your own money plus $20 in rewards each month, you could have nearly $100,000 in retirement savings 25 years from now.

More: MyBankTracker's Best Rewards Credit Cards

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