Credit Card Retirement Plan
Henry Clibborn- Credit cards offer a way to invest money for the future, but using credit cards to save for retirement has some drawbacks.
- The interest rates on credit cards are much higher than those on savings accounts and certificates of deposit.
- Credit cards come with variable interest rates, and typically have higher interest rates than other forms of debt, such as personal loans or auto loans.
Investing for retirement is generally suggested as one of the best ways for people to save and invest for their retirement years. There are a variety of ways to save for retirement, such as through mutual funds, 401(k) accounts, and IRAs. Although saving for retirement is important, saving for retirement using credit cards has a benefit that is not seen with many other investments.
What Is a Credit Card Retirement Plan?
Credit card retirement plans are savings vehicles that are tied to credit cards. When you save within your retirement plan, the money that you contribute is set aside in an investment account until you are ready to retire. When you retire, you withdraw the money from the investment account and use it to fund your retirement.
Some credit cards and lenders offer simple savings accounts that are linked to their card. For example, some American Express credit cards offer savings programs. You can set up an automatic savings plan where you contribute a set amount from your bank account to your savings account. You can also set up a withdrawal plan from the savings account to your credit card account.
Other lenders offer more complex savings plans. For example, lenders such as Ally Bank offer savings accounts that allow you to both save and invest.
Understanding the Credit Card Retirement Plan
The Credit Card Retirement Plan (CCRP) is an optional program that let's you increase your credit score and build your credit history by depositing a portion of your paycheck into your credit card account.
You get to choose how much money you want to deposit and in what amount. If you deposit $100 for 10 weeks, for example, you could deposit $50 per week for 10 weeks.
Your employer will have an agreement with the credit card company of your choice. If your deposit is made through your employer, you will be able to spend that money before you receive it.
How a Credit Card Retirement Plan Works
Credit card companies provide their customers with a number of benefits and features depending on their card. Credit card companies often offer perks such as air miles, free hotel stays, and cash back on purchases. Many cards also offer a retirement plan to their cardholders.
A credit card retirement plan can be thought of as a 401(k) plan that is offered by a bank, brokerage company, or credit card company. This type of retirement account allows you to make contributions on a pre-tax basis, so you won't have to pay income taxes on earnings until you withdraw the funds.
Credit card retirement plans are managed by a third party called an administrator. This administrator oversees the account's investments and ensures that your retirement savings are allocated properly. There are a variety of options available for these accounts, including mutual funds, stocks, bonds, and exchange-traded funds (ETFs).
Other Features of a Credit Card Retirement Plan
A credit card retirement plan is much like a standard IRA, but requires a checking account. In the meantime, the cardholder doesn't have to pay any taxes on the money received. The funds placed in such a plan grow in value, and just like a 401K, the cardholder can withdraw the money whenever he or she would like to.
Building Your Credit
Credit scores are an important indicator of riskiness for lenders. It is essentially a numerical representation of how likely a person is to pay back their debt. The higher your credit score, the lower the level of risk you represent to creditors.
Your credit score is a three-digit number between 300 and 850. The higher your credit score, the better; 720 and above is considered "good" and 700 or above is considered "excellent." According to FICO, 39% of Americans have less than "good" credit.
A credit score is determined by several factors, including:
Payment history
Amount of debt
Length of credit history
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The Bottom Line
The Tax Cuts and Jobs Act's deductions for 2018 and 2019 are more favorable for homeowners than in previous years. Although the new tax law makes some tax breaks for homeownership less valuable, it also provides incentives such as the mortgage interest deduction, which reduces the cost of homeownership for many Americans.
