Put your re­bate to work

The Covington News - - Business -

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).

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.

In­vest­ment Choices

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 longterm 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.

Rick Rogers

Colum­nist

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