There are some unusual credit cards out there. The Harley-Davidson Visapromises “benefits as powerful as your ride” and the chance to win free motorcycles. The Garfield credit cardallows holders to show their affinity for the lazy, obsessive, disdainful cartoon cat. The Star Trek credit cardoffered by the NASA Federal Credit Unionmust be a big hit at Comic-Con. However, there are also some exceptional credit cards that encourage tax advantaged savings for those who understand how they work.
Most Credit Cards Encourage Consumption
As must be evident from the commercials, most credit cards encourage consumption. Many offer incentives in the form of free airline travel which in turn inspires more spending since there are other expenses on a trip than just getting there. Besides, many studies indicate that people do spend more when paying with a credit card than paying with cash.[i]However, some cards encourage savings instead of consumption. They fall into two broad categories: cards that help save for retirement and cards that help save for college.
Cards for Retirement
Some cards set aside funds for retirement by paying rewards that can be redeemed directly into tax-advantaged investment accounts including traditional and Roth IRAs. Like other cash back programs, retirement rewards cards typically pay 0.5% to 2.0% back. Credit cards that encourage savings for retirement are offered by Fidelity, Bank of America, and Edward Jones among others. Typically, the cards are tied to retirement accounts in the institutions providing them, so a Fidelity card cannot be used to save in a Bank of America retirement account.
Cards for College Savings
Cards that encourage savings for college are typically linked to 529 plans, a tax-advantaged investment vehicle designed to encourage saving for the educational expenses of a designated beneficiary. The Tax Cuts and Jobs Act of 2017 amended the section to include K-12 public, private, and religious school tuition. While most plans allow investors from out of state, there can also be significant state tax advantages and other benefits. They include matching grants and scholarships, protection from creditors, and exemption from state financial aid calculations. Despite the many benefits, only a fraction of families takes advantage of these plans.[ii]Some of the institutions offering credit cards tied to individual 529 plans include Fidelity’s Rewards, Barclay’s Upromise, and the State of Illinois’ BrightStart card. Considering the local tax advantages (if you live in a state with state income tax), researching plans in your state of residence would be the first step. Our blogprovides more information on saving for college with a 529 plan.
You can use these special cards to your financial advantage. Their terms are always changing, so do some careful investigation before you sign. In this age of digital innovation, new products and new cards are continually being invented. Ask the institutions holding your money what credit cards they offer that empty into your current retirement and college savings accounts. It will pay dividends.
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