Help! Credit Card Rewards Put Me Over the IRA Contribution Limit

What could be more painless than saving for retirement by having cash-back rewards automatically swept into your account? A card linked to your Roth IRA could automatically get a boost from rewards, and you would never miss the money.

Except that the last part of “set it and forget it” can come back to haunt you at tax time. What if you forgot about the automatic reward deposits to your IRA when you were setting up deposits trying to maximize your contribution? Now you’re looking at the maximum contribution for 2014, and you see that your contribution is higher than that because of those reward contributions?

First, you’re not alone. Rewards are not the only reason someone might overcontribute. A higher-than-expected income can make you ineligible for an IRA (or eligible for a smaller contribution). Contribution limits for 2014 and 2015 are $ 5,500 ($ 6,500 if you are 50 or older) for Roth and traditional IRAs.

The remedy is the same in both cases. If you overcontributed, you can withdraw the money, plus any income earned from that contribution, by the due date for your tax return (including any extensions). Or, you can pay a 6% penalty on the excess contribution. If you choose to pay the penalty, be sure to reduce your 2015 contribution by the amount you overcontributed, otherwise, you’ll have to pay the penalty again next year.

But if you’ve run into this problem once, you can be sure you’ll want to avoid the hassle next year — and that’s not hard to do.

First, decide whether sweeping the money into a retirement account is the best use of your rewards. (It might be. Fidelity Investment Rewards American Express card (one of the best cash rewards credit cards in America), for example, offers 2% cash back, and you can direct where it goes, and you may choose investment accounts beyond retirement or education.) If your retirement savings typically falls well short of contribution limits, directing your cash rewards into your retirement or education accounts really is a painless way to save. (You should also be paying your balance in full every month, because paying interest or late fees will more than make up for any rewards you’re getting.)

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Second, be sure the account linked to your card stays on your radar. While it may be exciting to later discover you have funds in a retirement account you forgot about, forgetting about an account isn’t really something you want to do.

Third, know that it’s your responsibility to keep up with whether your contributions are legal. Here’s what the Fidelity card’s terms say:

It is your responsibility to ensure that contributions made by FIA Card Services to your Fidelity account on your behalf do not violate the terms of your Fidelity account or applicable laws or regulations, including IRS rules and limitations applicable to contributions to tax-advantaged retirement and higher education savings accounts.

So if you have to unwind a little extra contributions this year, just be sure you don’t have to next year. And review your reward card programs annually to make sure you are earning rewards you can actually use — and keep in mind that programs can change or be discontinued. Or you may decide that this year you’d rather max out your retirement savings with cash and get a earn a large travel reward bonus so you can take a vacation instead. You can find the picks for the best rewards credit cards at Credit.com.

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