Use Your Tax Rebate to Improve Your Finances

May 8, 2008

Most Americans will get a happy surprise in their mailboxes — or their bank accounts — before mid July: cash from Uncle Sam. The money is already starting to arrive, courtesy of the Economic Stimulus Act, which is giving most single people a $600 rebate and most married couples $1,200. Parents will get an extra $300 for every dependent child under age 17. (The rebate starts to phase out for single taxpayers whose 2007 adjusted gross income is more than $75,000; the squeeze starts at $150,000 for joint filers.) Most people didn't need to do anything to get the money other than file a 2007 tax return.

Here are a few ways to stretch your rebate check:

Increase your retirement savings. If you're not maxing out your 457 plan contributions, let the extra cash move you closer to that goal. A great thing about saving pre-tax dollars in a 457 is that the government's help eases the sting of setting aside money. That's why a $1,200 rebate check can help you boost your 457 savings by $1,600 with zero impact on your lifestyle.

Say you up your 457 contribution by $400 a month for four months. At first blush, that would cut your take-home pay by $1,600. But a $1,200 rebate would actually replace 100 percent of your spending power if you're in the 25 percent bracket. Sounds like magic, but if the extra $400 didn't go into the 457 each month, the government would claim $100 of it as taxes.

And with compounding, the money can stretch even further: Investing $1,600 now will give you an extra $17,000 in your account in 35 years, if your investments earn seven percent per year. If you're 50 or older, use the cash to help make catch-up contributions, which can increase your 457 savings by an extra $5,000 in 2008. Additional information about 457 contribution limits and catch-up contribution rules in our Products and Services section.

Pay off high-interest credit-card debt. Using the rebate to pay off a $1,200 balance on a credit card with an 18 percent interest rate can save you hundreds of dollars in interest. If, instead, you just made the minimum payment on that debt (4 percent of the balance each month), it could take nearly eight years to retire the $1,200 balance and cost you $635 in interest. The U.S. Federal Trade Commission offers useful information and facts about managing Credit Card Debt.

Steer the cash to your IRA. If you use your rebate to put $1,200 into a Roth IRA now and your investments earn seven percent per year, you'll end up with an extra $12,800 in 35 years. Because it's in a Roth IRA, the money may be withdrawn tax-free in retirement, as long as certain requirements are met. For more information about IRAs, see our IRA Calculators. To open a new IRA with ICMA-RC use our IRA Wizard.

Go to the the IRS website at www.irs.gov For more information about the rebates, including a calculator to help you estimate how much money to expect and a calendar listing the payment schedule.