Using Credit Card Rewards To Save For College: My Plan
A few weeks back Benjy wrote a great article about double dipping cash back returns by investing in retirement accounts. That article motivated me to do something I have been thinking about for a while. If you listen to or watch the podcast then you already know what I am talking about. I want to start using credit card rewards to save for college for my kids. My plan is to set a monthly goal, and to reach that goal, by using the various tips and tricks we share here at Miles to Memories. I will update you on my progress monthly. Details will be shared on where the money is coming from and how the account is doing. I will be starting from scratch so we can all go along for the ride. Hopefully some of you are compelled to join along with me and start your own fund and we can compare notes.
Disclaimer: This is for entertainment purposes only and is in no way financial advice.
My Investment Vehicle Choice – Roth IRA
I will be using credit card rewards to save for college and I will be investing those gains in a Roth IRA. That is a strange choice for college savings, and it might not make sense for everyone. That is especially true if you are not under the earning limits, but I think it works best for me. You also must have earned income in order to invest in a Roth IRA (at least $6,000 a year).
There are a few reasons I am going this route:
- Money deposited is done with after tax dollars and the money is not taxed upon withdrawal when used for retirement.
- A lot of the money I am earning is tax free too, since only credit card referral bonuses currently get a 1099.
- You are allowed to withdrawal deposited money penalty free since it was made with after tax money.
- This does not include any gains made on the deposited money.
- I can use it for retirement should my kids decide to go a different route and not go to college or if they get some kind of scholarship etc.
I will admit that it is a strange decision, going with a Roth IRA instead of a traditional college savings plan, but there is a method to my madness. What I am doing is essentially hedging my bets. What if my kids don’t go to college or they get a scholarship etc? By going this route I don’t have to worry about that. I won’t have access to the earnings until retirement, but I would be able to use the deposited money for school without any taxes or penalties being levied. If I had money left in the college savings plan then I could be hit with taxes and fees if not used for college.
I decided to go with SoFi for my IRA account. I like their website, it is very user friendly, and I already have a SoFi Money and SoFi Invest account with them. They don’t have any fees or minimums on the account which I like too. The one downside is they haven’t been in the game all that long.
UPDATE:
Since people are very focused on the investment vehicle and not the overall idea of the process I wanted to clarify a few things. This is not the only source of retirement savings we are doing and this is not the only vehicle we are using to save for college. The purpose of this series is to show what we can do with our skills when used for things other than travel. Use whatever investment source you want, that is not the important part. What works will heavily depend on your situation and what else you have going on in your life.
My Game Plan
So how do I plan on using credit card rewards to save for college? I am taking a 4 pronged approach. Not all are credit card rewards exactly but it falls under the travel hacking umbrella.
I will use the following to hit my $500 a month goal:
- Credit card welcome offers
- This will be a mix of cash back cards and point offers, hello Chase Freedom Unlimited!
- Cashing in points and cashback earned from every day spend
- Bank bonuses
- Reselling profits (I do this very sparingly)
Each month I will use a mix of these things to reach my $500 goal. That will put me at the $6000 a year Roth IRA cap. Which would give me a total of around $55,000 by the time my son starts his freshman year of college. It won’t pay for the full boat but it will put a dent in it for sure.
I Plan On Giving Updates Monthly On My Progress
I will be sharing everything along the way, giving you complete transparency. From the way I earned the $500 each to the current account bonus, it will all be out there. We are starting this journey together so I feel like you should be involved in the entire process. Like I said above, I hope you join along and share your data in the comments each month. I think that will only drive us to keep with it.
Look for my breakdown for August in the next few days. I will try to get the new update out on the first of every month, or within a few days of it at least.
I will be using a nest egg I have from cashing out Chase Ultimate Rewards with the pay yourself back feature during this. So far, I have cashed in around $3,500 worth of points. Just using that money each month would feel like cheating though, and lessen the experience, so it will sit in reserves until I need it.
Plus, my original plan was to keep it on the sidelines to book cash travel when things open up. I would still like to do that if at all possible. So I will use it to plug holes in months where I come up a little short, but I will do my best to earn it using other avenues each month.
Using Credit Card Rewards To Save For College – Final Thoughts
I think I am more excited about this series than any I have written. A big part of it is that it will hold me accountable and ensure I stick with it. It will also mean that I am helping to secure my children’s future (or my own if they don’t need the money 😂).
More than that though, I think it is something I would look forward to reading each and every month so I hope at least some of you feel the same way. I always enjoy reading posts by nomads sharing their expenses etc. (Stephen Pepper does a great job of this). I feel like this is in that same boat. We will be doing this together, total transparency. And like I said, I hope some of you join in on the fun and update me with your progress.
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[…] Since this was a cash bonus instead of cashback on a credit card, I will have to pay taxes on this come tax time. I will account for this as a 20% deduction to the total saved for our purposes here, following the lead of the Miles to Memories series I mentioned in Part 1. […]
[…] My Plan: Using My Travel Hacking Skills To Help Pay For College […]
Are you separately saving anything for retirement? If so have you determined that the first dollars you save for retirement should not be going to a Roth IRA? I think you can make a good case that with tax rates at likely unsustainably low levels right now the first dollars that people can afford to save for retirement should be their $6/$7k Roth IRA money instead of pre-tax 401k. If that is you, using up your limited Roth space just to be able to take the contributions and not earnings seems unwise. Even if you have decided to save pre-tax money for retirement this uses up your IRA contribution limit and blocks you from making deductible IRA contributions for the entire duration of this plan, which even if not on your radar now could change. This seems unwise to me for a number of reasons. 529 allows yo to avoid tax on gain before retirement. That is it’s beauty. The idea is that college expenses go up every year and you’re keeping pace with those increases with market gains that can be withdrawn tax free. With Roth, you put in $6k now that probably buys half of what it would buy in education in 2020 dollars in 18 years, but can’t touch the gain if under 59.5. If really worried about not using the money for education, I would just put the $500 in a taxable account and pay the 15 percent capital gains tax, and then separately stretch to try to get something into Roth. Anything. Even $1,000 a year.
Larry I never said this was the only way we were saving for college or that it was the only retirement savings. Thanks for the comment.
Wait… I love this idea. For complicated reasons, I probably know more about higher ed finances than… well, thean most people.
But:
1) Isn’t there a 10% withdrawal penalty ex death/home purchase? Or will you be over 55?
2) For a bunch of reasons that I won’t detail, Gift of College giftcards & 529s offer all these advantages and more. Your Roth route seems to make GoC cards unusable. Or am I missing something?
There is no penalty on withdrawing money that you deposited into a Roth IRA since it was made with after tax money. There would be a penalty on anything taken out that is from the earnings on the investments before 59 1/2.
I don’t have any high level gift of college cards around me available to purchase.
What a clever idea. A college degree is not overrated if it is from the right college.
A college degree is overrated & unnecessary for many Americans. I would better spend my kids college savings on a few epic road trips in Australia or Africa. In our digital world kids will be just fine without a college degree. If they want to be successful, they will be. Save money for something else!
David – that is one of the perks of going the Roth IRA route. If they do end up doing something else it is a retirement account so nothing is lost.
Interesting comment. At almost 71 (in 2 weeks), looking back at my husband’s (he’s 70) and my career paths, there are merits to both approaches – college or not. I have 2 masters degrees (luckily part scholarship for undergrad, state u for the 1st MS, and reasonable tuition for the 2nd earned while I was working) – got me only so far up the corporate ladder (corporate librarian/digital services analyst at major tech company). Made a decent wage, but never achieved a management position and was forced into early retirement at 54. DH dropped out in his first semester, but he was a natural salesman. Had his own business, learned on the fly, eventually sold it and finally at 50 went to work direct selling advertising for a small company. He loved sales and was an ace at cold-canvassing (most sales people hate that kind of sale, but I think he could truly sell ice to eskimos!), and his talent quickly got him a mid-six figure salary (like almost 4x my last salary!!!!) His success at his company got me a work-from-home job as his admin assistant – lousy pay, but easy and flexible with fabulous benefits (equal to my corporate ones) that carried me over until social security and Medicare. (and our marriage survived the work relationship – coming up on 35th anniversary this year!)
I think you need to recognize your strengths, weaknesses and level of dedication and ambition – those are really the key elements to help you choose your path and achieve both your goals and ultimate success.
The problem is once you start viewing credit card bonuses and credits as part of your financial plan, then you can no longer truly value it as travel fund, especially for the flexible currency that can be converted to cash (UR/MR). Fine, that’s not truly a problem, but for some of us who were interested in financial independence in the first place, we’re back to square 1. The decision is no longer, should I go to Paris or Tokyo this year, but that 120k MR = $1500 extra cash that I can fund my Roth IRA and another 80k UR can be used to beef up my emergency fund by $1200, etc.
I think you can find a balance if you set a yearly goal of savings etc. Use what you need to help hit it and travel with the rest.
What is your total dollar target? I suppose it’s plausible to have some gains made from this effort, but the bigger question is how is this scalable? One can only get so many credit card sign up bonuses, and effort to resell becomes a much bigger effort when the CC bonus runs out.
$500 a month is the target to max out the $6,000 a year cap on Roth IRAs. Bank bonuses, spending offers, cashing in points from normal spend activities etc. will all be included as well. It will be a combo of things and change each month on what I use to get there.
Couple of thoughts: 1) how many opportunities do you foresee to be able to capitalize on to scale this? Especially if your credit report is basically going to have so many open accounts that banks will consider you a risk giving you a credit card. 2) If you are cashing in your points from spend, then you effectively are robbing Peter to pay Paul, as opportunity cost of those points are effectively cash that would have been in your pocket.
1) this is a two player mode and as said above it will not be mostly credit card welcome offers etc. Those will be mixed in but will not be a main focus.
2) There is opportunity cost but that is usually much less than my earn rate. If you are talking about a 2% cost on all purchases I am often able to earn 6% or more on my purchases so it becomes negligible. I could just take the cream of the top but it isn’t worth it to me to jump through those hoops. All of this was earmarked for travel in the past so I am not giving up money I would have had otherwise. I am just going to have to be more diligent to do both things at the same time.
Roth IRAs can work. I’d like to point out that you need earned income from working to be able to fund a Roth IRA. CC SUB’s don’t count.
That is true – I will add that in.
This plan sounds like my girlfriend when she gets back from the mall: “I saved $500!”. Yeah, we’re getting richer every day…
I guess I don’t follow your analogy but thanks for the comment Tino.
If kid gets a scholarship, you can withdraw 529 without penalty. This is what happened to us.
I believe that you avoid the 10% fine if that is the case but you are still taxed on the earnings as income.
An important clarification — the recipient of the non-qualified distribution recognizes the gain as ordinary income. This can be the beneficiary. And beneficiaries can be freely changed within the family before the non-qualified distribution. Many children have low tax rates at the time of the distribution. And, what they do with the money when it is distributed is their business, including making a gift back to their parents (so long as it is under the annual cap or reported if above).
(If it’s not clear from my two comments — I hate this idea. I understand you’re invested in it, but as a long-term planning scheme for someone with an expected $6,000 investment each year, future college expenses likely or at least possible, and also a need to save for retirement, it’s too clever by half.)
Larry you are focusing on the investment vehicle. Both vehicles have their pros and cons but that isn’t really what the series is about. The series is about using our skills in the hobby to be able to save money towards a goal. The skill set doesn’t have to be solely used for travel. That is what people should get out of this not whether I decided to use a Roth or a 529 account, they can choose whatever investment account they want.
A lot depends on the state you are in and what perks it gives you, how much money you make now and what you will “make” during retirement. Will tax rates be higher in the future than they are now. What other investments do you make etc. It is all very personal and a unique situation and what works for one won’t work for someone else. You are looking at the trees and missing the forest here.
I like the big picture point, Mark – whether one is directly investing the dollars you generate from points and miles activities or using those points and miles to save money on travel (or other things) and then investing that savings. Direct or indirect, it’s a great idea to talk about investing all sorts of “found” money and taking advantage of tax benefits or compounding gains.
I do think it’s important, though, for everyone understand that for a 30-50 year old thinking about these issues, the details – that is the investment vehicles or strategies selected – can over time make a difference of hundreds of thousands of dollars. I’m sorry if I’m coming off as argumentative on the details, but I still do really have reservations about the idea of using a Roth IRA as a college savings account for most people.
Understandable, it isn’t a great option for everyone as I said in the article. I currently am not funding a Roth IRA account which I saw as a weak spot. I think it is a great account and I like its versatility so I wanted to take advantage of it. I also wanted others to know that it can be an option for college savings and as a way to hedge your bets. You have access to the money should something catastrophic happen or plans change. Or you can sit on it until retirement etc.
Would I suggest it be the only investment vehicle you use? No. And I updated the article to say that after this conversation so it is more clear. But I think this is a good option to use for a variety of things because of the way it is set up.
And I think this series is something someone can follow along with whether it is for retirement, buying a house etc. That was more the point I was going for. Hopefully that is what they take from it.