Net Gains: Smart Plans for Your Rebate


Those tax rebates millions of Americans are counting on are tied up in Congress and could be the subject of a political showdown over the coming week.

President Bush and House Speaker Nancy Pelosi struck a deal to give the U.S. economy a quick, cash infusion in the form of tax rebates equaling $300 to $600 per person for low- and middle-income Americans. But the Senate version calls for smaller checks -- up to $500 per individual -- sent to a larger number of people.

My guess is that eventually checks from the IRS will start showing up in our mailboxes. The questions are when and how much. Let's assume for a moment they start arriving in late May. That would be around the same time many Americans would be receiving their annual tax refunds.

Combine the two, and a family of four could be looking at a quick $4,000. I based that figure on last year's average tax refund of about $2,200 and the $1,800 a married couple with two children could receive under the House rebate plan.

Now we're talking some real money -- and some real financial opportunities.

You could take 10 percent of that $4,000, have some fun with it and still have plenty left to save for a rainy day or pay down debt today. Thirty-six hundred dollars makes for a nice Roth IRA contribution, a college savings contribution or a dent in your credit card balance or mortgage.

For ideas on smart things to do with this possible tax windfall, I reached out to my fellow members of the Garrett Planning Network.

Here's some of what they suggested.

Home repairs: Jennifer Hartman of Greenleaf Financial Group in Los Angeles recommended taking care of needed home repairs, but only those that are really needed. "This might save you money later on and/or may increase the value of your home."

Roth IRA: Many financial planners are recommending taxpayers consider using their anticipated rebates to contribute to a Roth IRA.

Jake Engle of Wealth Planning and Management in Seattle takes it a step further and recommends those with a long time horizon consider invest the rebate in a small cap value fund within a Roth. He sees it as both a good investment in both one's future and in the U.S. economy.

"Most new jobs are created by small companies," Engle said. "Therefore, when investors supply capital to small cap companies during a recession, they are helping to end the recession sooner. It's good for the country and for jobs."

Roth IRAs are a favorite retirement planning tool of financial planners because although there is no upfront tax, accumulated funds can be withdrawn tax free in retirement.

Retirement savers can convert a traditional IRA to a Roth IRA, but there is a tax bill associated with the conversion amount.

Mary Erl of Nestegg Financial Advisors in Gurnee, Ill., suggests using the rebate funds to help cover the taxes triggered by a partial conversion of a traditional IRA to a Roth. The recent stock market declines will help lessen the tax impact, she said.

"With equities this low, there is less of a tax impact now to do the conversion," Erl said. "When equities rise again, the increase will be tax-free."

She warns taxpayers to be aware of the complications associated with a conversion and suggested they consider seeing a financial adviser for help. "This is not appropriate for all, even if they are eligible," Erl said.

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