Goodbye, Membership Rewards


Let’s make a deal: right now you have 8 round trip airline tickets, but you have a chance to trade them in for a year of your retirement in relative comfort. Deal or no deal?

I love to travel. That love far predates my understanding of award travel, though my love of luxury travel is a direct result of countless hours spent studying miles and points. I have invested a lot of hours in this hobby and that investment has paid off with years of rambling down the yellow brick road of first class flights, 5-star hotels, and memories that will last a lifetime. Beyond the travel itself, one of my favorite things about miles and points is the feeling of freedom that comes from the knowledge that I have enough made-up funny-money currency to take off and go almost anywhere I want at the drop of a hat. The idea of giving up that freedom for 1.25c per point has never felt appealing, hence why there had never been a Schwab Platinum card in my household. That changed this week and I stand ready to pull the trigger on redeeming almost all of my Membership Rewards points. I can’t seem to kick the sadness in what feels like giving up future luxury travel dreams in exchange for something that won’t make any impact on my life for many years. But the magnitude of that future impact is too much to ignore, so I think I’m ready to say goodbye to my Membership Rewards points.

Thinking more about the 1.25c Schwab redemption

We recently reported on a long-standing rumor that the rate at which Membership Rewards points can be redeemed to a Schwab brokerage account would decrease from 1.25c to 1.1c per point on September 1st, 2021. In response to our post, a reader commented saying that redeeming points this way to a Roth IRA did not count against the annual Roth IRA contribution limit. We don’t know that this reader was correct, but we published a post about the concept yesterday after another blog highlighted the opportunity.

Of key importance is the fact that we don’t know that the interpretation offered by that reader and others we cited is correct. The fact that Schwab does not count Membership Rewards redemptions against the annual contribution limit tracker and does not account for those as contributions on the annual 5498 form it sends to the IRS and Roth IRA account holders does not definitively mean that Membership Rewards redemptions don’t count as contributions. And I believe the penalty for overcontributing is 6% of the overcontribution per year until it is corrected. I believe you may also be subject to a withdrawal penalty when correcting an overcontribution assuming you do not yet qualify to withdraw from your IRA. In other words, the penalty could be steep if you make a mistake here.

I am not a CPA, lawyer, financial advisor, or other wizard of tax and investment information, so take my interpretations here as not better than anyone else’s and certainly as being far less qualified than your own CPA, with whom I encourage you to confer before you make any decisions in this realm. This post is not legal, tax, or investment advice. Be entertained by my musings and do your own research.

I don’t know why Schwab doesn’t track Membership Rewards redemptions to a Roth IRA as contributions either in the activity tracker or on the form 5498 that they file with the IRS reporting contributions to the account. Maybe it’s poor IT and they don’t have it in the budget are too lazy to fix it. I imagine that Schwab has a CPA or two on its staff, but it is also certainly possible that they have just overlooked this. Maybe Schwab hasn’t noticed the fact that the amount of cash being deposited into IRAs somehow doesn’t reconcile with their accounting. Maybe they just don’t want the responsibility of figuring it out and expect the accountholder to do so. Maybe Schwab thinks that Membership Rewards redemptions shouldn’t count against the annual contribution limit but they are wrong (and they do disclaim that you should consult with your own tax professional about it in the terms). Ultimately, I don’t know why they handle it the way they do.

One explanation we see within the reddit thread to which I linked is that Schwab considers Membership Rewards redemptions like a bank bonus similar to a brokerage bonus for moving investments to a new custodian (which typically does not count against your annual contribution limit). While a Membership Rewards redemption feels different on the surface, I find the wording of the “Invest with Rewards” section of the application terms interesting for the way it refers to a Membership Rewards Invest with Rewards redemption. Bold here is mine for emphasis:

Invest with Rewards

This reward is only available to the Basic Card Member on a Platinum Card® from American Express Exclusively for Charles Schwab who maintains an eligible account at Schwab (an “eligible account”). An eligible account means (1) a Schwab One® or Schwab General Brokerage Account held in your name or in the name of a revocable living trust where you are the grantor and trustee or (2) a Schwab Traditional, Roth or Rollover IRA that is not managed by an independent investment advisor pursuant to a direct contractual relationship between you and such independent advisor. Additional Card Members and otherwise authorized third parties, including authorized account managers, may not redeem Membership Rewards points for this reward.

A Basic Card Member may redeem a minimum of 1 thousand and a maximum of 4 million Membership Rewards® points every 7 calendar days for this reward.

Redeemed points will be immediately deducted by American Express from your Membership Rewards® account. Schwab will deposit associated funds into your chosen eligible account within 4 to 6 business days, excluding bank holidays. Points are not refundable once redeemed.

This reward is subject to the Terms and Conditions of the Membership Rewards® program. Please consult with your tax advisor regarding the tax implications of any reward.

They repeatedly refer to this redemption as a “reward” and that they note that Schwab will make a deposit into your account. Does the fact that you are redeeming a “reward” with American Express and Schwab is essentially fulfilling that reward make the difference in terms of coding this differently than a contribution? I am certainly not qualified to answer that, but the terms drew my interest.  Elsewhere in the terms I noticed that it was worded similarly:

Invest with Rewards

Use Membership Rewards® points for deposits by Schwab to your eligible account.

Again, I don’t know that this means anything and I can’t emphasize in strong enough terms that you should consult with your own tax advisor. Please don’t make any tax or investment decisions based on the questions of a miles and points guy.

But let’s imagine for a moment that the hype is right and the naysayers are wrong: let’s imagine that Membership Rewards points can indeed be redeemed subject only to the program limitations above.  Is that enough to give up on my dreams of a family ANA round-the-world trip or one of ANA’s many other sweet spots?

Thinking about the long-term implications

I have had a Roth IRA for more than a decade and have always deposited the maximum amount with the hopes of my money growing for many years and simplifying my retirement with tax-free withdrawals, so I have a decade of experience with a Roth to give me perspective as to how it can possibly grow (though obviously past performance is no guarantee of future performance). On the other hand, I also have plenty of experience with award booking to know just how much fun it could be burning through my Membership Rewards points with travel.

Take a classic example of amazing value: round trip first class on ANA from Eastern/Central cities like New York, Washington, or Chicago to Tokyo would ordinarily cost upwards of $20,000, but when awards are available those same seats could be booked for just 120,000 Virgin Atlantic miles round trip (a 1:1 Amex transfer partner). With my collection of Membership Rewards points, my family of four could do something like that a couple of times (we’d never find award availability for four in first class, this is just an example). With 1,000,000 Membership Rewards points (just a theoretical large number of points), I could book 8 round trips like that. That’s $160,000 worth of first class flying. Each round trip from New York would be more than 24 hours of flight time — so we’re talking more than 8 days of first class flying with a million Membership Rewards points.

Alternatively, 1,000,000 Membership Rewards points could be redeemed for a $12,500 deposit by Schwab. If this idea of contributing it to a Roth IRA is correct, it could grow for the life of the account without ever owing taxes on the earnings. According to the Internet, average stock market returns over the long-haul have been 10% annualized (obviously this can vary wildly in reality and does not guarantee future returns). So how much could that $12,500 grow to become if returns over the next 30 years match historical returns?

According to an investment calculator, based on 30 years at 10% each year (and based on no other contributions), it would be worth….more than two hundred grand.

It’s not hard to imagine $218,118 funding an entire year or more of relatively comfortable retirement even assuming quite a lot of inflation over the next 30 years.

Let’s make a deal: Would you trade 8 days of first class flights to pay for a year of retirement?

Obviously that’s a question we face every day on some scale when we buy a coffee or a new iPhone or subscribe to HBO Max or open a new credit card with a $550 annual fee. And clearly there is no guarantee that money in any sort of investment account will actually compound at ten percent annually over the next 30 years. Goodness knows that invested money could drop to $0 in value, though if you’re investing broadly the chances of it being quite that dire seem low. At lower returns, the eventual value is less staggering. For example, a 6% annual rate of return only turns that $12,500 into $71,794. And what if it only averages 6% and I retire and need the money in 20 years? It would be just over $40,000. Those numbers are a lot less exciting.

Still, I had to stop and think about all that: even if that $12,500 only turned into $40,000 that I could use in my retirement tax-free, would that be worth the trade? If I were the type to ordinarily pay $20,000 per ticket for that ANA first class example, the answer would obviously be no. But I am certainly not that type of person. So if my options were:

  1. Use a million points to book ANA first class round trip to Japan 8 times
  2. Use a million points to put $12,500 into a retirement account

Which would I choose? As much as I love flying up front, when I look at those potential returns, I have a hard time justifying the ANA flights. Even if those 8 round trips only cost me $40,000 of retirement money — a pretty low-return scenario — we’re talking about $5,000 per round trip. Would I be willing to spend $20,000 to fly my family of four round trip to Japan? Heck no I wouldn’t. Sure, the price would be well below sticker price, but I’m not going to spend that kind of cash on flights alone.

Except that’s sort of what I’d be doing if I redeemed the points for travel. And I both love and vehemently hate the Schwab Platinum card and the Invest with Rewards redemption for forcing me to think about it. The truth is that if we completely throw out the Roth angle and we just assume depositing that million points into a normal taxable brokerage account and letting it grow for 20 or 30 years, we’re still looking at the returns shown above, just subject to tax on gains instead of being tax-advantaged. For all the talk about Roth to this point, ending up with a hopeful $100K-$200K in retirement represents a much wiser use of Membership Rewards points than all my fancy trips. The Roth angle makes a significant difference, but whether the money is invested in a Roth or a normal taxable brokerage account, the 1.25c redemption rate almost feels misleadingly low given that, at 10% annual growth, that money would stand to nearly double (though net would obviously be less than double if taxable, but still far more than 1.25c). That’s true about every cent in our hands today: they could all be worth a lot more in the future if we’re able to invest and hold and the market continues to perform. Obviously we all need to spend money to do things we want to do. Will my trip to XYZ be worth sacrificing a day of retirement? Will my new shoes today be worth an hour of retirement? Obviously I’ve made that type of trade plenty of times to enjoy the “here and now” and surely I will again several times by this afternoon. That concept is neither new nor original and I’m not going to turn into a FIRE-type person because of Schwab Invest with Rewards. Neither am I done with award travel, but I find it too hard to ignore the value of redeeming most or possibly all of my Membership Rewards points right now in exchange for a potential windfall in my retirement years. The potential growth is just too much to ignore.

Isn’t the same thing true with my Chase Ultimate Rewards points, Bank of America Premium Rewards points, and many other award currencies and/or cash back? It absolutely is. I have noted that Chase Pay Yourself Back has made me think of award redemptions in terms of the dollars and cents they will cost me since I could easily have cash at the grocery store with those points. The difference here with Membership Rewards is obviously the gamble as to whether or not one can indeed redeem the points for a Roth IRA reward. If true, it increases the long-term value of Membership Rewards points beyond the value of other transferable currencies. Indeed, it makes Membership Rewards points more valuable than the tangible currency in my pocket if I can redeem it for a tax-free reward that my money can’t buy. Indeed the funny-money is not so funny anymore. That’s the part of this that I couldn’t shake. Those luxury trips that felt like the goal of earning rewards pale in comparison to the potential future value with good old-fashioned saving for a raining day.

At the risk of being repetitive, I don’t know beyond a shadow of a doubt that the Roth angle is possible at a scale greater than the $6,000 you can ordinarily contribute in cash (subject to income limits), but if it is it makes it very hard to justify keeping Membership Rewards points rather than redeeming them. Even when the redemption changes to 1.1c per point it will be hard to ignore, though the current 1.25c rate and a healthy balance of points pushed me to open the Schwab card. I haven’t yet redeemed the points — despite all the logic of a couple thousand words and hours of contemplating this, I still haven’t been able to accept giving up on the travel and freedom that the points represent even though I don’t have impending travel to book. Membership Rewards have been my favorite transferable currency and it is hard to imagine a 0 balance. Maybe I won’t redeem all of my Membership Rewards points, maybe I won’t redeem any of them, or maybe I’ll clean house recognizing that by this time next year I could once again have a healthy enough balance of points and have bought myself a year of retirement by stepping outside my comfort zone with a 0-point balance. Truth be told, I have enough points in various airline and hotel programs that it’s not like I would be grounded for the year or two it would take me to build back up.

Bottom line

I never before considered redeeming Membership Rewards points at 1.25c each. At FTU’s Virtual Seminar this past weekend, Stefan Krasowski of Rapid Travel Chai said that redeeming points like that felt to him like giving up and I completely connect with that sentiment even as I write this post. Yet the long-term potential of a Roth IRA redemption is so compelling as to make me re-think travel redemptions. That’s a problem I’ve come to with Ultimate Rewards over the past year as well, though the sizable bump here if the Roth angle works puts the Schwab angle over the edge in terms of making it so compelling that I feel like it’s time to say goodbye to my current Membership Rewards balance and start over from scratch in building up. On the one hand, I suppose this push comes at the right time since I still don’t have much travel booked and have enough points in other programs to cover my travel needs for at least a year while I work on rebuilding the Membership Rewards balance. I can’t help but feel sad to say goodbye to the yellow brick road I’ve been paving with Membership Rewards points for years, but the future impact is too much to ignore. I’ll still enjoy luxury travel, just a little less than I may have and with other currencies for a while. That seems like a trade I can’t refuse. You win, Schwab. Deal.

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