Put Your Tax Rebate In an IRA or 529 Plan – GENIUS!

Tax GraphicA client asked me what they should do with their economic stimulus tax rebate they will get later this year. (So will you!). Usually I tell people to pay down debt if they have any. They don’t have any. They also have already maxed out their IRAs for 2008. But, they have kids! So I told them to put it in their 529 plans. Then, the lights came on and the chorus sang.

Here in Colorado you get a state income tax deduction for every dollar you put in a Colorado 529 plan. Although this varies from state to state, many states have some sort of tax deduction available if you are using the in-state plan (which is why your advisor should have gone over in detail with you about your state plan before he put you in another state’s plan. If he/she didn’t, you might have a bad advisor.)

How awesome is this? You get money from the federal government as part of this stimulus package. That money is not only free money, but it is also tax-free money. So, if you put that money somewhere that will give you a tax break, you are making even more money! Here in Colorado it is like getting a 4.5% bonus on your rebate. You get the rebate plus 4.5% more back in the form of dollars off of your 2008 taxes. Plus, your kids have more money for college.

If you qualify for a deductible IRA contribution, put the money in there and you can get a federal tax deduction! If you are in the 30% tax bracket, that’s like getting an extra 30% on your rebate which you will get as money off of your 2008 taxes.

No kids and don’t qualify for a deductible IRA? You can still contribute to a Roth IRA. No, you won’t get a bonus like above, but you get tax-free growth on money you never paid taxes on in the first place. Not a bad deal there either.

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