IRAs are Individual Retirement Accounts that are subject to very strict contribution rules. For example, contributions to an IRA must be cash deposits. This is money that comes from your checking or savings account or is deducted from your paycheck. You may also be able to fund your IRA indirectly with a credit card.
To contribute money to your IRA using a credit card, you must be able to take a cash advance against the card. If you cannot, you won't be able to fund your IRA using a credit card. Once you've taken a cash advance from the card, you deposit the money into your checking account and make a contribution to your IRA as you would any other cash contribution.
The significance of being able to make contributions using your credit card is that you are able to fund your IRA on margin. This means you're using borrowed funds to fund your IRA. You can contribute a large sum of money up front and pay for it over time.
The benefit of contributing to an IRA using borrowed funds is that you are using leverage. You get a large lump sum of money to invest immediately, instead of having to contribute that money out of pocket. With the minimum payment on your credit card, you can carry the balance on your card for as long as you need.
The disadvantage to using a credit card to fund your IRA is that you pay interest on the borrowed funds. If the amount of money you pay in interest exceeds the amount of money you are able to earn in your IRA, there's no advantage to investing in the IRA using a credit card.
Before using your credit card to fund your IRA, think about whether you could really earn more than what the loan is costing you. If you have a low-interest credit card charging you 2 percent interest, you may be able to earn more than that in your IRA. However, if your credit card charges an APR of 19 percent, it may not be possible to overcome the cost of interest in the IRA.
- IRS: Publication 590
- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007
How to Use an IRA to Pay Off Credit Card Debt
If you have an individual retirement account, the Internal Revenue Service can't stop you from taking a withdrawal. However, if you take...
How to Determine a Simple IRA Contribution Amount
To determine the maximum simple IRA contribution amount, visit the IRS Web site, or ask the human resources department. Contribute as much...
Can I Use a Credit Card to Buy Stocks?
You can use a credit card to buy stocks, but it is not advised since interest charges will have to paid on...