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Jordan Goodman is the author of Everyone's Money Book, available at 888-201-6300. This is the third edition of the book. You can also visit his Web site at www.moneyanswers.com. He talks with us on Thursday mornings.
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July 31, 2003
"What to do with your Child Tax Credit Refund"
Over the next few weeks, over 25 million Americans are going to be getting
an unexpected happy surprise from Uncle Sam: a rebate check for $400 per
child under age 17. This is happening because the tax cut bill that was put
into law in June raised the child tax credit from $600 to $1,000,
retroactively to January 1, 2003. So, if you filed for a child tax credit on
your 2002 federal return, you will get a check for $400 per child. You don’t
have to ask for the check; it will be sent out to you automatically.
The purpose of sending out these checks is to help families make ends meet
a bit better and also to stimulate the economy by putting money into
consumer’s hands that they will spend. Already, stores are starting to
advertise that you should spend the money with them.
So, the big question of the moment is: What should you do with these checks
for $400, or $800 for 2 kids, or $1,200 if you have 3 kids? Here are my
suggestions:
- College savings: Since the windfall is being generated by your child,
spend it on the child’s education. If you have always said you can’t afford
to fund a college savings plan, now is the time to start one. You could put
the money into a tax-free Coverdell Educational Savings Account (ESA), into
which you can put as much as $2,000 a year and can be used for many
educational expenses at both the secondary and college level. You could put
the money into a Section 529 College Savings plan in your state or another
state. Your state’s plan may offer you a state tax deduction for the
contribution, and the money will grow tax-free as long as you use it for
college expenses. You could open a Uniform Gift to Minors Act (UGMA)
account which you can invest in a wider array of choices, but which has fewer
tax benefits. For a more detailed look at all these plans and more, check out my "Everyone’s Money Book on College" at www.moneyanswers.com.
- Pay down debt: If you are paying 18% or more on a credit card, you can
get an instant, tax-free, risk-free 18% return by paying off that debt,
which no other investment I know of can guarantee.
- Invest for retirement: If you are eligible and haven’t fully funded a
Roth IRA, put the money in there. The money grows tax-free and if invested
well, could grow into a nice stash in retirement, which you will surely need.
If you aren’t eligible to fund a Roth, put the money in a traditional IRA,
or a variable annuity that grows tax-deferred for your retirement.
- Spend the money on an item of long-term value: Put the money into home
improvements, a sturdy home appliance, tuition for a course that will
improve your skills, or something else that will pay off in the long run.
The worst things you can spend it on are consumable items, like dinners,
movies and vacations, that are gone right after you’ve enjoyed them.
I know my priority of uses for the money may not be considered "patriotic" -- if
the idea of this tax cut is to stimulate the economy dramatically -- but I
think if you ever get a windfall from the government, you should make the
most of it for the long run, and not just blow it to boost the economy for a
month.
For More Financial Tips From Jordan Goodman
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