Roth IRA Loophole Using The Schwab Amex Platinum Card?

Roth IRA Loophole Using The Schwab Amex Platinum Card?

Not too long ago, Propublica published an article that caught a lot of people’s attention. “Lord of the Roths: How Tech Mogul Peter Thiel Turned a Retirement Account For The Middle Class into a $5 Billion Tax-Free Piggybank“. It’s quite eye-opening. Many of us had no idea that some of the world’s ultra-rich are amassing billions of tax-free Roth money built on assets from sweetheart, inside deals. I certainly didn’t. And I know what you’re thinking. It’s not fair. The rich just keep getting richer. Why isn’t there a Roth IRA loophole that us common folks can take advantage of? Turns out, maybe there is one. I recently discovered that there is a Roth IRA loophole using the Schwab Amex Platinum card.

But should you do it?

Here are my thoughts…

 

Potential Roth IRA Loophole

Last week, I was browsing through my Facebook groups. On the Frequent Miler Insiders group, one of the members had noted that is possible to redeem Amex Membership Rewards points directly into a Schwab Roth IRA. Furthermore, the redemption of Amex MR points seemed to not count toward the $6,000 annual contribution limit.

Therefore, you can theoretically transfer 1,000,000 Amex Membership Rewards points directly into your Roth IRA. At the current rate, these points can be redeemed for 1.25 cents per point. Thus this redemption would add $12,500 to your Schwab Roth account balance. And this money is in a Roth account, it will grow tax-free and can be withdrawn in retirement tax-free too. That’d be amazing!

 

How is This Roth IRA Loophole Possible?

At first, I couldn’t believe it. The Roth IRA loophole using the Schwab Amex card seemed too good to be true.

If true, then I can potentially fund my Roth IRA with an infinite amount of Membership Rewards points as long as I can easily earn tons of points through credit card sign up bonuses and manufactured spending.

Maybe may Roth IRA won’t be as massive as Peter Thiel’s. But still, my Roth IRA would definitely have much more money in it if I could somehow deposit cash beyond the $6,000 contribution limit.

So how is this possible?

Account Bonus versus Contributions

Apparently, Schwab considers Membership Rewards deposits as account bonus earnings and NOT contributions. Therefore, these “account bonus” deposits are NOT taxable. And you will not receive a tax form for account deposits from Membership Reward redemptions.

This has been discussed by several others on both Reddit and the Bogleheads forum.

Nick from Frequent Miler wrote an entire post dedicated to this. In his article, he noted:

“Membership Rewards are coded as a bank bonus, which is relatively consistent with previous precedent we’ve seen in determining rewards as being rebates / purchase incentives / bonuses that are not considered to be taxable. The closest analogy here is a brokerage bonus. Most brokerages offer a cash incentive to move investments. When I opened a Roth IRA at Merrill Edge last year and moved a Roth account to Merrill, I received a $225 bonus based on the amount transferred. That $225 is coded as a bank bonus / investment gain and did not count against my annual contribution limit. Apparently, Membership Rewards points are handled similarly.”

Wow. Well okay then. I guess it is true. This is a Roth IRA loophole.

Of course I had to find out for myself. So I started a live chat with a customer service representative at Schwab. I simply asked: “If I had the Schwab American Express Platinum card, can I use the “Invest With Rewards” feature to fund my Roth IRA?”

Here was her response:

Well, that confirms it.

Sitting on a huge stash of Amex Membership Rewards points (almost a million!), I really wanted the Schwab Amex card so that I can redeem some or all of these points for 1.25 cents.

It’s important to note that after September 1, 2021 the redemption rate decreases to only 1.1 cents per point. While reduced, this could still represent a high value redemption.

Schwab Amex Platinum Card

In addition to the ability to redeem Amex Membership Rewards points at a decent rate, the Schwab Amex Platinum card (not an affiliate or referral link) has many other benefits.

Some of the more notable benefits include:

• Current welcome offer of 100k points after spending $6,000 in the first 6 months
• 10x points earning on restaurants and other eligible purchases up to $25k in the first 6 months
• 5x points earning on flights directly booked on airlines
• $100 credit with Schwab holdings of $250,000+ or $200 credit with holdings of $1,000,000+ on approval and each year
• $200 Airline Fee Credit annually
• $200 prepaid hotel credit annually valid on Fine Hotels & Resorts and The Hotel Collection bookings
• Up to $240 in credits for select streaming services annually
• Up to $300 in Equinox credits
• $179 CLEAR fee reimbursement annually
• Up to $200 for Uber rides annually which can also be used for Uber Eats
• Up to $100 in credits annually for purchases at Saks Fifth Avenue (up to $50 in credits semi-annually, enrollment required)
• $100 Global Entry fee reimbursement

As you can see, there are a lot of benefits from the card. But of course it comes with a steep cost. The annual fee of the card is $695.

 

Is the Schwab Amex Platinum Card Worth It?

When signing up for new credit cards, it is always worthwhile to determine if it’s worth paying the annual fee.

Everybody’s situation is different. But for me, it would be worth it because of the following:

• The sign up bonus of 100k MR points alone is worth $1,250 to me with the ability to transfer those points at a rate of 1.25 cents per point before September 1
• Beyond the first year, I could use most of the available credits to offset the annual fee
  • I have more than a million in holdings in my Schwab account, so I would qualify for the $200 statement credit
  • Most likely I can utilize all of the $200 airline fee credit
  • I can probably use at least $100 of the available Uber credits via Uber Eats
  • The $100 Saks Fifth Avenue credit would be easy to use for small purchases like sunscreen
  • I can use the $240 in streaming services credit for my wife’s Audible subscription

Applying For The Schwab Amex Platinum Card

Because the card is worth it to me, and I really wanted the ability to redeem my Amex Membership Rewards points for 1.25 cents per point before the rate is reduced on September 1, I applied for the Schwab Platinum card last week.

Unfortunately, I was not automatically approved. It was my first time not being instantly approved by American Express. Instead, I got the dreaded “We’ll let you know as soon as we’re done reviewing your application” verbiage.

Getting Approved for the Card

After patiently waiting for a day, I went to check my application status online.

Fortunately, I was approved.

Should I Transfer Points to My Roth?

After receiving my card in the mail a few days ago, I linked my Schwab card to my Schwab account. I was ready to transfer my points.

However, a few things gave me pause.

First of all, there were numerous commenters on that Frequentmiler post who said they wouldn’t do it. Additionally, there was a response article written that recommended not to deposit Membership Rewards points directly to a Roth account and outlined the reasons why. Essentially, the argument against doing this Roth IRA loophole is that Schwab erroneously reports deposits as a contribution when in reality it should count as a contribution. And if the IRS finds out, there is a 6% excise tax (penalty) for each year the excess contribution remains inside the Roth IRA.

Furthermore, I cannot directly contribute to a Roth account anyway due to my high income. My Roth contributions are through the backdoor via Roth conversions from a traditional IRA every year. So any additional “bonus” or “contribution” (or whatever you want to call it) may be flagged as suspicious behavior.

If I was able to take advantage of this Roth IRA loophole using the Schwab Amex Platinum card without the IRS finding out, the best case scenario would be a few extra thousand dollars or Roth money every year that could potentially grow. An extra few thousand of Roth money is quite a bit, but it’s unlikely going to move the needle much.

The worse case scenario is that the IRS flags me for suspicious behavior, all of my accounts get audited, and I get penalized with the 6% excise tax (or worse!). I’ve heard some horror stories. You definitely don’t want to mess with the IRS!

 

Bottom Line

Given everything that I’ve learned, the answer to the original question is a strong no. I will not take advantage of this perceived Roth IRA loophole using the Schwab Amex Platinum card.

The juice isn’t worth the squeeze. In other words, the risks of IRS scrutiny and being penalized just ain’t worth the potential benefits of a few extra Roth bucks.

In general, I get pretty excited about credit card rewards and all the creative ways of maximizing them. So this potential Roth IRA loophole using credit card rewards seemed pretty enticing. However, using credit card rewards for travel hacking is one thing. But using credit card rewards for IRS hacking is a whole different ballgame. And I definitely don’t want to play games with the IRS!

That said, I am excited about my new Schwab Amex Platinum card. It comes with a great welcome bonus and a lot of benefits that I can use.

While I won’t take advantage of this Roth IRA loophole, I will indeed transfer at least some of my Amex Membership Rewards points to a regular taxable Schwab brokerage account.

After all, one of my friends has noted that with tax loss harvesting and withdrawing that money in a lower marginal tax bracket, that money in a taxable brokerage account could be even better than money in a Roth account.

It would be awesome to withdraw some of that money tax-free just like as if it were in a Roth account when I retire.  That’s the plan at least!

 

What are your thoughts on this Roth IRA Loophole? Would you do it?