Choosing a college fund rewards card



Dear Joe, Which credit cards contribute to a 529 plan? Thank you. -- Craig


Dear Craig,

Among the proliferation of "rewards" credit cards, you'll find a few that are tied to 529 plans. For families with children, these appear at first blush to be no-brainer deals: Use a 529 rewards card instead of cash to pay for all your purchases, then just sit back and wait for the rebates to drop automatically into your 529 college-savings account.

Of course, this strategy works best if you pay off the entire balance on your statement each month. Otherwise, the interest you pay is likely to exceed the amount of rebates earned. You should also consider which particular card is going to produce the highest reward. (If you're planning to purchase a General Motors Corp. vehicle, perhaps you should make the GM 5-percent rewards card the first piece of plastic you pull out of your wallet or purse, and not your 529 rewards card.)

Some of the 529 rewards cards are linked to specific 529 plans while others allow you to designate just about any 529 plan, or other type of investment account, to receive your rebates. With all of them, you can request that the balance in your rebate account be sent directly to you instead of to your investment account, but there might be a time delay and additional requirements, such as a signature guaranty, before you get your money.

Here are the most popular 529 rewards cards, none of which charge an annual fee:

The Fidelity 529 College Rewards Card from MBNA earns a generous 2-percent rebate on your purchases, with a maximum annual rebate of $1,500. Suppose you have a child attending a private college charging $20,000 in tuition. Using the card to pay this year's tuition will get you $400 toward next year's bill. You can set it up so that the rebates from this card are automatically deposited into any of the Fidelity-managed 529 plans. Fidelity has programs in Arizona, Delaware, Massachusetts and New Hampshire.

The Citi Upromise Card offers a 1-percent rebate on general purchases, with an annual rebate cap of $300. When used at certain retail locations, however, the rebate is boosted to 2 percent (Exxon or Mobil stations) or 10 percent (grocery and drug stores) with no annual caps. The card can be linked to any of the 529 plans managed by Upromise Investments Inc. (New York's college savings program being the largest).

The GHESP/Futuretrust MasterCard from Juniper Bank is linked to Georgia's Higher Education Savings Plan, managed by TIAA-CREF. It offers a 1-percent rebate on general purchases and no annual cap. If you don't want to use the Georgia 529 plan, you might consider Futuretrust's self-branded rewards card. It has the same terms and can be linked to most investment or bank account, including 529 plans.

Finally, there's the BabyMint College Savings Credit Card from MBNA, offering a 1-percent rebate and no annual cap. Like the Futuretrust card, you can set up your rebate account to have the dollars swept into the 529 plan or other investment account of your choice.

It's easy to confuse the 529 rewards credit cards with the various 529 rewards purchase programs. Upromise, Futuretrust and BabyMint all operate purchase rebate programs that do not require the use of their branded credit cards, although paying for your purchase with the credit card might produce bonus rebates. Another 529 rewards service, but one that currently does not offer a credit card, comes from Little Grad.

In any of these purchase rewards programs, you simply make your online or offline purchase through the program-affiliated merchant network, and you earn a rebate for that purchase. (Upromise and Little Grad make available a software download that captures rebates from your online purchases even when you do not first log onto their sites.) The amount of rebate will vary among the participating retailers. It pays to compare the rewards services when making major purchases, because the same item could earn different rebates depending on the particular reward service.

Rebates deposited into your 529 plan are treated the same as direct-cash contributions, and you have to count them for gift-tax purposes. For most families that should not be a problem, since the $12,000 annual exclusion will be sufficient to cover the additional gifts. Having added over $2,000 to our own 529 accounts over the past few years with rebates on items we normally buy, I can personally attest to the benefits of 529 rewards programs.

Popular Questions


Two kids, two 529 plans?

Dear Big Bill,
While it's possible to maintain a 529 plan in just one child's name, even when you intend to send more than one child to college, I generally recommend that families open a separate 529 account for each child.

That's assuming there is no additional cost to maintaining multiple accounts. If your 529 plan charges an annual or quarterly account maintenance fee, check to see if you can avoid the fee by signing up for automatic contributions through payroll deduction or electronic funds transfer)

With a separate 529 plan for each child, it becomes easier for you to tailor the mix of stocks, bonds and stable-principal investments (e.g., stable value, guaranteed principal and money market funds) to the particular ages of your children. When your older child is nearing high school graduation, you may want to ratchet down the level of market risk in her 529 plan. At the same time, you could keep a more-aggressive asset allocation in your younger child's 529 plan, accepting more risk for a potentially higher return. Many 529 plans offer "age-based" investment options that automatically make these adjustments as the beneficiary ages.

Separate accounts for your children also offer more gift-tax leeway. Since your 529 contributions are treated as gifts from you to the account beneficiary, your $15,000 (in 2018) annual gift exclusion will go twice as far with two accounts -- one for each child -- than with just one account.

Financial aid is another reason to recommend maintaining separate accounts. You wouldn't want the investments reserved for your younger child's future college expenses to count against your older child's financial aid eligibility. Be warned: The rules here are rather murky, and the impact of a sibling's 529 account may depend on the college's own policies as well on as the type of aid -- federal or institutional -- being sought.

Finally, I believe that separate 529 accounts allow for better family bookkeeping. There will never be any doubt as to your intention to help send all of your children to college. You'll avoid the uncomfortable position of being asked to explain to a curious 8th-grader why account statements are showing up in the mail with only a brother or sister's name on them. And in the event of your death or divorce, no matter how unlikely, your legal representatives and other family members will have less reason to question your actions in setting up and funding the 529 plans.

Even with separate accounts, you'll continue to have the flexibility to shift the money around in the future. You simply need to make sure that whenever funds are withdrawn from the 529 plan to pay for college they are coming from an account in the name of the child incurring the costs. It's a simple matter to change the beneficiary designation among family members at any time, transfer 529 funds between different family members' accounts or split one 529 account into two. The ability to move assets around the family is a key advantage of 529 plans when comparing other college-savings alternatives, such as Uniform Transfers to Minors Act, or UTMA, accounts.

Original Post: 2005-10-13
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Coverdell ESA vs. 529 Plan: Which to choose? (Script)

The Coverdell ESA and the 529 plan are both excellent college savings vehicles because they are both tax-free when used for college. But many families face a choice: do they use a 529 plan for all of their child's college savings, or do they use a Coverdell for the maximum amount of $2,000 each year and put any any extra savings above $2,000 into a 529 plan? In spite of its low annual contribution cap, Coverdell's are now attracting quite a few families. There are two major reasons for that. One is that only the Coverdell allows you to self-direct your investments, just like you might self-direct the investments in your IRA. The other is that in addition to college expenses, Coverdells can be withdrawn tax-free to pay for a broad range of K-12 expenses, while 529 plans are limited to K-12 tuition. This feature is appreciated most in families planning to send their children to private grade schools, which may include additional costs such as room and board or uniforms. A 529 plan, on the other hand, does not impose age limits or income limits like the Coverdell does and so overall we see a lot more money going into 529 plans than into Coverdells. Plus many savers are happy with the investment choices offered by the 529 plans and don't necessarily want to self-direct their investments. And don’t forget this: your state may be giving you a state tax deduction for using a 529 plan, but there are no states offering a state tax deduction for investing with a Coverdell ESA.

Learn more about Coverdell ESAs.

Original post date 2013-07-15
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