Archives for June 2005

(Continued from Part 1: Citi Dividend Platinum Select MasterCard)

Some of you may have noticed in my Net Worth Updates that I have a 529 account. Yet, I have no kids! The MBNA/Fidelity Investments 529 College Rewards Card is why.

Like I mentioned in Part 1, I buy everything I can with the Citi Dividend Card to get 5% back. Everything else I use this card or the Amex Starwood. This card also has no annual fee, and gives you 2% cash back on all your purchases (up to $1500 annually) which can only be transferred to a Fidelity 529 account. (You can be the beneficiary, no need to procreate.) 2% is a very generous amount of cash back, very few cards offer 2% straight cash back on everything, and those that do are usually invitation-only. This is not straight cash back, but very close!

(If you do have kids, this may be a great way to save for their education, I’m ignoring this scenario for the next few paragraphs)

So you have to open a Fidelity-managed 529 account. I chose the Unique Plan as it’s offered as the “National Plan”. You get to pick how your money is invested, either in an Age-Based plan, a Static Plan ranging from 100% bonds & money market to 100% stocks, or a custom mix of both. I chose the 2009 Portfolio, designed for people starting college in 2009 (50% stocks, 40% bonds, 10% cash). I just picked it as a more conservative option as I’m my only beneficiary for now and I didn’t want to risk my principal much.

(edited) Per the rules, you can withdraw the principal without penalty, even if not used for college. There are penalties on earnings withdrawn not for college, since one of the perks of the 529 is that earnings grow tax-free. Any earnings on nonqualified distributions will be subject to federal income taxes at the distributee’s (me) rate as well as a 10% federal penalty tax. When you withdraw, the amount withdrawn is always the same percentage principal and earnings.

Let’s say you put in $100, and it grew to $110. If you take out all $110, then you have to pay tax + penalties on the $10. No or penalties tax on the $100. Now let’s say you just take out $55. In this case, $5 is considered earnings and is subject to tax + penalties. $50 is not taxed or penalized. So, you only get penalized on any growth in your principal.

What does this mean? Short version: With this card you can get basically 2% cash back on all your purchases!

Long version: Ok, say you spend about $750 per month on your credit card. Over a year, you’d get $180 at 2% back in the 529. Say it grows 4% to $187.20. You want to cash out, no problem, just call up Fidelity and ask for ask for a check. You are the one responsible for making sure you pay taxes for unqualified purchases. Got kids? Keep it in there and let it grow tax-free! Your new $5,000 home audio set-up just added $100 to their college fund!

So you get the check. Your penalty on the $180? Zip. Your penalty on the $7.20? Assuming a 25% tax rate + the 10% penalty, you’ll keep $4.68. Net? $184.68, or 2.05% cash back! If your investments lost 4%, you just get the $172.8, or 1.92% cash back. Still almost double the 1% you get from most other cards.

Ok, there are some catches. You must open the 529 with either $1000 or a $0 and a $50 automatic monthly deposit. I went with the $50 monthly deposit. Also, there is a $30 annual fee if you don’t meet this or other certain requirements. The easiest way to get around this is to keep up the automatic deposits. Remember, you can get all your money back out with no penalty. Personally, I’ve chose to leave all my money in there for my future kids, I think this is a great way to save.

Does this sound like too much of a pain in the butt? Try the Fidelity Investment Rewards MasterCard. You can get 1.5% cash back into a Fidelity Brokerage account. The key? There are no minimum balances if you get online statements! So, when the cash comes in, just transfer it back to your checking account. Voila! 1.5% cash back, still better than 1%.

Tips: Got grandparents or other relatives that aren’t as interested in credit card rewards? You can get them to sign up for this card for themselves, yet the rewards go to (you or) your kid’s 529 account. I bet that could really add up. Again, don’t bother with the 2.9% balance transfer offer, you can do better elsewhere.

Ok, there are more little details to this card, but this post is running really long. Check out the site, and if you have questions, please post a comment!

Next: Starwood Preferred Guest American Express Card (Great rewards card, could be worth >3% cash back!)

Yeah, earning free money off 0% balance transfers is great, but those cards go straight from the envelope to the lockbox. So what’s in MY wallet? Only the best rewards cards, of course:

This entry used to be about the Citi Dividend Card, but since it is no longer available I have replacing it with the Citi Driver’s Edge MasterCard (discussed here) which has a similar but not identical rewards structure.

Also in my wallet are the MBNA/Fidelity Investments 529 College Rewards Card with 2% cashback towards a 529, and the Starwood Preferred Guest American Express Card, which is a great airline/hotel rewards card.