By now, you know that President Biden has signed into law the
American Rescue Plan Act of 2021, a $1.9 trillion package to provide
additional relief from the economic and health effects of the COVID-19
pandemic. While several provisions of this legislation may affect you,
the one that’s most imminent is the direct payment. What can this money
mean to you?
First, here’s some background: If you had adjusted
gross income of up to $75,000 ($150,000 for joint filers), you are
eligible for a $1,400 payment ($2,800 for joint filers), plus an
additional $1,400 for each eligible dependent, including full-time
students younger than 24 and adult dependents (with the payment going to
the qualifying taxpayer, not the dependent). The payment amount is
phased out above certain income thresholds. (If you already filed your
taxes for 2020, the IRS will use that information to determine
eligibility and size of payments; if you haven’t filed yet, your 2019
tax return will be used instead.) Your payments won’t be taxable for
2021.
You may already have received your payment, especially if
you arranged for direct deposit. If you don’t need the money to meet
immediate needs, how should you use it?
Here are a few possibilities:
Build (or replenish) your emergency fund.
In general, it is a good idea to have three to six months’ worth of
living expenses in an emergency fund to pay for unexpected costs, such
as a major car repair or a large medical bill. Without such a fund, you
might have to tap into your long-term investments, such as your IRA or
401(k). Many people whose income was affected by the pandemic have
turned to their emergency funds, so, if you are one of them, you might
want to use some of your new payment to help rebuild your fund. Even
relatively small amounts can give you a feeling of some security,
though, over time, you should strive to get the fund back up to a more
robust level.
Fund your IRA. You can put up to
$6,000 in a traditional or Roth IRA, or $7,000 if you’re 50 or over.
(Roth IRA contribution limits phase out over certain income levels.) If
you have already “maxed out” on your IRA for 2020, consider using some
of your stimulus payment for the 2021 tax year.
Recontribute to your retirement account.
As part of last year’s CARES Act, withdrawal rules were temporarily
loosened for retirement accounts, such as your IRA and 401(k), for
individuals impacted by COVID-19. If you withdrew funds from these
accounts, you might want to recontribute the money (if eligible), using
some of your stimulus payment. Not only will you be strengthening your
progress toward your retirement goals, but you can get a potential tax
benefit, because you can exclude any money you recontribute on or before
the tax filing deadline of May 17 (or even later, if you get an
extension) from your 2020 tax return. Otherwise, the withdrawals you
made will generally be counted as taxable income over a three-year
period. See your tax advisor before making a recontribution.
These
aren’t the only uses for your stimulus payment – you could also pay
down debts or contribute to a college fund if you have young children.
In any case, use the money wisely – this opportunity is unlikely to pass
your way again any time soon.
This article was written by Edward Jones for use by your local Edward Jones financial advisor.
Edward Jones. Member SIPC.