You may not be familiar with its formal name - the Economic Stimulus Act of 2008 - but you’re almost certainly aware of its key outcome: a tax rebate. Now comes the big question: What should you do with it?
If you spend it, you will do your part to help stimulate the economy. But by investing the rebate, you could help speed your progress toward your long-term financial goals, such as a comfortable retirement.
Before we look at investment possibilities, let’s quickly go over the "nuts and bolts" of the plan:
How much? You can receive up to $600, if you’re filing as an individual, or $1,200, if you’re filing a joint return. Plus, you can get an additional $300 for each qualifying child. However, the size of your rebate will be reduced by $50 for every $1,000 you earn above adjusted gross income (AGI) limits ($75,000 for singles and $150,000 for married couples).
When? The IRS will begin mailing Stimulus Act rebate checks in May. If you’ve selected the "direct deposit" option for receiving your 2007 income tax refund, your Stimulus Act rebate will be placed in the same account that you’ve chosen for your refund.
Here are a few possibilities for investing your rebate:
Traditional or Roth IRA - Suppose that you are a joint filer and did receive the full $1,200 rebate. If you put that $1,200 in an investment that earned a hypothetical 7 percent return, and that investment were placed in a traditional or Roth IRA, the money would grow to more than $9,000 in 30 years. (This figure does not include fees, commissions or expenses, all of which would reduce your investment returns.) Keep in mind that traditional IRA withdrawals are taxable, whereas a Roth IRA’s earnings have the potential to grow tax free, provided you don’t begin taking withdrawals until you’re at least 59-1/2 and you’ve had your account for at least five years.) All investments within these accounts do fluctuate in price, so it is possible to have more, less or the same amount when you sell your investments.
Section 529 savings plan - In a Section 529 college savings plan, you put money in a specific mix of investments. Section 529 plans are tax deductible in some states for residents who participate in their own state’s plan. All withdrawals will be free from federal income taxes if the money is used for a qualified college or graduate school expense of your child or grandchild. (Withdrawals for other reasons may be subject to federal, state and penalty taxes. Also, Section 529 distributions will appear as income on the child’s tax return, which could affect financial aid calculations.)
Emergency fund - It’s a good idea to put six to 12 months’ worth of living expenses in a liquid account for use as an "emergency fund." Without such a fund, you might be forced to liquidate some of your long-term investments to pay for things such as a costly car repair or an unexpected medical bill.
A rebate like this one doesn’t come along every year - so put it to work for you. Someday, you may be glad you did.
Submitted by Laura Evans, a financial advisor with Edward Jones in Richmond Hill.