Consider planting tax rebate and watch savings grow

ByABC News
April 11, 2008, 1:21 AM

— -- Starting next month, millions of Americans will receive tax rebate checks ranging from $300 to $600, or $1,200 for married couples. The rebates are intended to rejuvenate the economy by encouraging consumer spending. But here's a better idea: Use your rebate to jump-start a retirement savings plan.

Consider: If you invest $1,200 in an individual retirement account and continue to save $1,200 a year while earning an average annual return of 8%, you'll have more than $21,000 in 10 years. If you use the money instead to buy a flat-screen TV, then 10 years from now, you'll have an old flat-screen TV.

And there's no reason to stop with your tax rebate. This is the time of year when millions of taxpayers receive sizeable refunds from the IRS. So far this year, the average refund is $2,464, according to the IRS. Combine that with your rebate, and you've created a solid foundation for retirement security.

There are, of course, other smart ways to use your rebates and refunds. If you have credit card debt, pay that down first; in effect, you'll reap an immediate return of 18% or more. Make sure you have enough in savings to cover your expenses for a few months if you lose your job. And if your employer offers a 401(k) plan, be sure to take advantage of it, especially if your employer offers a company match, says Maliz Beams, executive vice president for TIAA-CREF.

Once you've checked those items off your to-do list, it's time to take a serious look at an individual retirement account. Basically, IRAs come in two flavors:

Traditional:Contributions are deductible if you're not covered by a 401(k) or pension plan at work. You're also eligible to deduct contributions if you're covered by an employer plan but have adjusted gross income of less than $52,000 if you're single, or less than $83,000 if you're married and file jointly. (These are for 2007 IRA contributions; the limits are higher for 2008). Singles who are covered by an employee plan can deduct a reduced amount if they have an AGI of up to $62,000 ; for couples, the cut-off is $103,000.