Don't fritter away those extra dollars

PERSONAL FINANCE

March 29, 2009|By EILEEN AMBROSE

A frequent gripe about the new tax credit that's now showing up in paychecks is that it doesn't amount to much more than lunch money.

An extra $10 or so a week could boost the economy if everyone spends it, but the dollars might seem insignificant to an individual.

Or at least I was inclined to think so until my colleague, Dave Zeiler, said he is putting the credit toward raising his 401(k) contribution by 1 percentage point. That is meaningful, and it made me think about other things to do with the cash that could have a bigger impact in our lives than lunch at McDonald's.

Before considering the options, a little more about what's called the Making Work Pay tax credit that was part of the federal stimulus package lawmakers approved in February.

It's available this year and next, and worth up to $400 for singles and $800 for couples filing joint tax returns. The credit starts phasing out once modified adjusted gross income hits $75,000 for singles and $150,000 for couples. The IRS recently issued new withholding tables so employers could reduce the amount of taxes taken out of paychecks and get the money into your hands. Check with your employer if you don't see a difference in pay by April 1.

Be aware, the new tables "don't take into account a lot of complicated factors," says Bob Trinz, senior tax analyst with Thomson Reuters' Tax & Accounting. You could get the full credit in your paycheck this year, receive only part of it or even get too much depending on your situation.

Those getting too much are likely singles with multiple jobs or two-income couples where each employer is reducing withholdings. They can adjust their withholding to have more taxes taken out.

Those who get only part of the credit this year can claim the rest on the 2009 return.

But if you get the full amount in your paycheck this year, here are some ways to put it to use. Most won't jump-start the economy, but they can leave your finances in better shape:

Be like Dave: Put the cash in a 401(k). "You aren't going to miss it because you didn't have this money before," Zeiler says.

Little sums add up over time. Baltimore's T. Rowe Price Associates ran the numbers:

Say you invested an extra $400 two years in a row and left it there. If you earned a conservative 6 percent annual return over 40 years, that $800 would grow to $7,996 ($24,090 if you earned 9 percent yearly). Couples saving their full credit would see double those amounts.

President Barack Obama wants to make the credit permanent. If so, investing $400 each year would grow to $65,619 over 40 years with a 6 percent annual return; $147,317 at 9 percent.

Invest: If you're brave enough to enter the market, a low-cost way to buy stock is through Dividend Reinvestment Plans, where you buy shares from a company.

Many DRIPs allow you to invest $25 to $50 a month through automatic debits from your bank account. Look for DRIPs with no fees, such as plans at Exxon and Lockheed Martin, says Chuck Carlson, publisher of the DRIP Investor newsletter.

Call 800-233-5922 to get a free sample of the newsletter.

Mutual funds often require an initial lump sum investment. But you can start investing through automatic payments in most of Price's funds for $50 a month. That's doable for couples getting $800.

Invest in yourself: Take a community college class to brush up on skills for work.

At Carroll Community College, for example, you can take Business Ethics in a classroom or online for about $340. Classes that cost $200 and up can be paid in installments.

Or help send someone to school by investing in a 529 college savings plan.

The Maryland College Investment Plan allows you to invest as little as $25 a month through automatic payments.

Spend it! After all, that's why Uncle Sam is giving us the money.

Check out eLayaway.com, where through small payments you can buy big-ticket items like electronics, vacations, sporting goods and more from hundreds of merchants. Layaway plans last two to 13 months depending on the retailer. ELayaway debits payments from your bank account, and once you've fully paid, the item is shipped. You'll pay a 1.9 percent fee.

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