(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 There are penalties on earnings withdrawn not for college, since one of the perks of the 529 is that earnings grow tax-free.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 When you withdraw, the amount withdrawn is always the same percentage principal and earnings.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!)
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I just got back from a trip where I was listening to a book on tape about 529 plans. I need to get one started and this card seems like a great way to do so. Can’t wait for your third post in this series!!!!
Thank you very much for all the helpful information. You have a great blog for frugal people with goals like me…..I just have one question. If you don’t have kids, will you have to pay a penalty to withdraw the money from the 529?
Nope, please see post above. Any money you put in, the principal, can be taken out without penalty. The earnings on that principal while in the 529 will be penalized if not taken out for proper college purposes.
I’m just wondering if by using this card and setting up a 529 plan, you had to make the initial $1,000 investment or have to make the $50/month investments at fidelity.
Yes, you have to either put in $1000 initially, or start with nothing and agree to add in $50 monthly. You can take these out later, but you do have to put something in first.
Hi, great post and nice links. Thank you. A few questions I have remaining after reading the cardholder agreement and the Fidelity terms/conditions:
How inconvenient is it to request and get disbursements from the Fidelity 529 plan? Do you request it quarterly when the points convert to dollars or do you request it monthly to also get back the $50 that you’re investing automatically? I ask this only because I didn’t see anything about minimum balances, but I did see the 0.30% annual maintainence fee, which would incentivize me to keep the account barely funded.
John – I don’t know, I’ve never requested a disbursement, but it appears to be straightforward. I don’t like the fees either, but they are okay for now. I may change my mind later though.
The terms seem to suggest that if you don’t spend a full $100, you don’t get a pro-rated number of points (i.e., no fractional points). Is that how it works?
How do they know you’re taking the money out for college purposes? Thx
Jen – No, on each statement the 2% rewards are accrued monthly and are rounded to the nearest penny. I don’t know why they speak in points, it is noted as cash $xx.xx on all my statements.
will you be penalized if you stop the $50 automatic withdrawal?
Is this Fidelity 529 card limited to $1,500 per credit card account or $1,500 per 529 account? In other words, if my in-laws get a card linked to my son’s 529, is their limit $1,500 and my limit $1,500 so our son gets $3,000, or can our son’s account get only $1,500?
Thanks for the tip!
I have always known about the Fidelity/MBNA 529 credit card but I did not want to start a 529 at Fidelity due to its higher expenses compared to Vanguard (since on large balances, the higher expenses at Fidelity will offset any advantage of the 2% credit card).
Now, I know what I will do: I will use the $50 monthly contribution to keep the 529 account open, and cash out the 529 balances regularly, keeping the balances in the 529 account small.
You have an excellent blog and I learn a lot! I am very interested in 529 plan and especially the 2% cash back Fidelity credit card. I called Fidelity today and the CSR told me that I have to pay penalty for both principle and profits in the account if I withdraw it not for proper college usage. Besides, I have to pay income tax for profits. I got confused that you mentioned there should be no penalty on principle.
Hi, thanks for the information. I like the 529 plan and especially like the 2% cash back Fidelity card. But I have one question about the penalty if the money is not used for college. As you indicated, one can withdraw the principal without penalty, even if not used for college. But how can IRA determine which money is principal, and which is profits? Suppose in the whole year I invested $1000 as principal, and the profit is $100. So if I withdraw $1000, will IRA take all the $1000 as principal? Or IRA will take part of it as principal and part of it as earnings? Thanks in advance!
Alex – I don’t know what the Fidelity rep said, all I know is what the legal forms say. Principal can be taken out at any time without penalty.
If you take that $1,000 out, just have documentation that you also put $1,000 in sometime in the past as principal as you’ll be fine. You don’t even need to file anything extra with taxes. I didn’t.
The accounting for 529s is not very mature, and you don’t get any time of forms indicating whether it was “treated” as principal or not. The only time you’ll even need the documentation is if you get audited.
I noticed you can also pay bills with this card! Does that mean I can also pay my credit card bills using it (and not have it considered to be a “balance transfer”)?
The BillPay only works with certain payees. But no, it will not be considered a balance transfer. However, you will not earn cashback on billpay transactions.
Doh. That’s what I was thinking about when I noticed the bill pay feature. Maybe I could possibly squeeze out another 2% on top of the 5% from the other card. Thanks for the info!
On the topic of 529 plan, has anyone signed up for membership for websites such as http://www.BabyMint.com as a mean to save for 529 plan? The main benefit is similar to the rebates offered by Citibank’s merchant network except it offers a more complete merchant list.
I edited the original post to reflect the fact that the terms now state that any withdrawals are considered both principal and earnings in the same ratio of the entire account. The terms did not state this initially when I opened the account a few years ago (I remember having to read the entire long thing.)
That is, if 10% of the account is earnings on the principal (you own deposits + MBNA’s deposits), then 10% of any withdrawal is considered earnings. Remember than non-qualified withdrawals of earnings have a penalty. Withdrawals of principal are not penalized.
This doesn’t change the fact that this card still gives you about 2% cash back, but does make the tax reporting more cumbersome.
I got this off the site!
$20 annual maintenance fee per account (waived with automatic investments, direct deposit or if the combined value of accounts with the same beneficiary is $25,000 or more).
Have to keep the automatic investments or direct deposit until $25,000
Come October, Fidelity Investments is likely to take over as the manager of California’s ScholarShare College Savings Plan. Californians get ready for MBNA/Fidelity Investments 529 College Rewards Card.
I have 2% rewards card and I pay the monthly statement in full each month.
I pay at ibsnetaccess.com online for these cards. But last time when i paid, I remember there was a message saying – if you pay the statement online, that payment amount will not be considered for rewards. I didnt have time to dig much deeper, but since then I’ve reverted to using my Citbank Dividend platinum card, which gives 1% cashback.
After you reach 1,000$ in your account do you have to keep making the $50 dollar automatic monthly deposits?
The “cash-back” is credited to your account monthly? not quarterly?
When you do have kids, can you convert your 529 plan to their name in order to keep the gains tax-free? Or can you pay for your childrens college expenses out of your own 529 plan?
PS: I have a UPromise account set up linked to my credit cards and when I go grocery shopping they deposit money into it. I haven’t linked it to a 529 plan yet, so the free money is just accumlating in there. I plan to set up a 529 if/when I have kids and it will already have a balance…
Jonathan, I am not sure whether you received this update in the mail like I did, but Fidelity has now waived the $20 annual maintenance fee that used to require us to use the $50 auto monthly deposit.
link
Yep, covered them here:
Changes to Fidelity 529 College Rewards Credit Card
Haven’t edited this post yet, though.
Oops, so I see. My bad, I missed that on your site! Man, those are great changes to those who already have a 2% card though, huh?
A good way to go is to combine the Chase BP card with Chase Freedom card. This way I am avg about 2.2 % for all of my purchases