From the January 2009 issue of Research Magazine • Subscribe!

Retirement Rewards Cards: Yea or Nay?

Money is scarce, times are hard, and it's time to get out...the credit card?

While that may be the last thing some advisors would tell clients during an economic downturn, the Fidelity Retirement Rewards American Express Card might make some FAs change their tune.

Unlike most rewards cards, which offer points or cash refunds, Fidelity's new card -- available December 10 -- helps fund the cardholder's retirement savings.

Here's how it works: Investors earn two points for each dollar spent on purchases. There is no annual fee, caps or limits on rewards.

Once a card member reaches a minimum of 5,000 points, or $2,500 in purchases, points can be automatically swept as a $50 current year contribution into the user's designated Fidelity IRA. If the card member has maxed out their IRA contribution for that year, they can continue to accrue points and restart automatic deposits to their IRA the next year.

Rewards from the card can be swept into several types of Fidelity IRA accounts, including traditional IRAs, Roth IRAs and SEP IRA accounts. Investors also have the flexibility, at any time, to automatically redeem their rewards as cash into other Fidelity accounts or accumulate rewards and redeem them for travel, merchandise and other rewards.

"I like the concept," says Michael Kalscheur, CFP and financial consultant with Castle Wealth Advisors LLC in Indianapolis, Ind. "It's tangible; people will see the money going into their account on a regular basis. Many small business owners use their AmEx card to run their business, so here is a way they can save for their future versus getting frequent flyer miles or something they might not use."

Kalscheur points out several issues that advisors and their clients should think about. "My main concern is that since these deposits are going into an IRA, be careful that you don't contribute more than the annual limits," he says. "For example, if you normally contribute the full amount ($5,000 or$6,000 with catch-up for 2008) to your IRA, now you have to wait and see how much your benefit will be, and then contribute the difference.

For those who tend to charge less, "The $50 a year they earn might not be worth the hassle," he says.

"Also, make sure to read the fine print," Kalscheur adds. "There are probably minimum amounts that must be transferred (i.e. $50), so if the person doesn't use the card that much, they may not see transfers very often. Lack of activity causes people to lose interest and cancel the card for something better."

One final item to remember: It's still a credit card and might not be appropriate for every client. "It doesn't make any sense to earn 2 percent and then pay 20 percent interest on an outstanding balance," says Kalscheur. "If you can't control your spending, stick with the old standby: cash."

To learn more, go to www.fidelity.com/retirementrewards.

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