Many individual investors and families will receive one-time tax rebates under an economic stimulus plan approved by Congress and signed into law today by President Bush. TIAA-CREF, the financial services organization and leading provider of financial services in the academic, medical and cultural fields, offers the following tips for investors looking to use the tax rebates to help achieve future financial goals.
The $168 billion stimulus plan would offer tax rebates of at least $600 to many individuals and $1,200 to couples filing jointly, with families with children receiving an additional $300 per child.1
The rebates can be directed to investments that can potentially provide dividends in the future. While we understand and appreciate that Washington policymakers intend middle class taxpayers to spend these rebates to stimulate the economy, we have a responsibility to encourage Americans to save.
The following are suggestions from TIAA-CREF:
"We want to give investors good guidance on how best to use their tax refunds," said Maliz Beams, Executive Vice President for Individual Client Services. "Even dedicating a few hundred dollars toward retirement or higher education savings can potentially offer substantial benefits down the road."
With their federal rebate, investors can:
Open a new IRA or fund an existing IRA: Individual Retirement Accounts, or IRAs, offer tax-advantaged investing for retirement. There are two types of IRAs available to investors that both offer tax advantages in allowing money to accumulate for use in retirement.
A Traditional IRA allows investors to make potentially tax-deductible contributions that can also accumulate tax-deferred. Anyone with earned income who is under 70½ can make after-tax contributions to an IRA. Funds in an IRA accumulate tax-free until withdrawals are made. Although withdrawals before the age of 59 ½ are subject to a 10% federal tax penalty, exceptions are made for a first home purchase, tuition costs or medical expenses (certain restrictions apply).
A Roth IRA enables investors to contribute after-tax dollars to a tax-deferred account. The advantage of a Roth IRA is that contributions can be withdrawn at any time, making the investment appealing for investors who may want access to the funds before retirement. Individuals who qualify can contribute up to $5,000 in 2008 in either a Traditional or Roth IRA, or $6,000 for investors 50 and over.
Investors interested in opening an IRA through TIAA-CREF can apply here:
http://www.tiaa-cref.org/products/ira/open/open_account.html.
TIAA-CREF also offers retirement planning and advice from retirement specialists that receive no sales commissions as part of their total compensation. Instead, they are compensated through a salary plus incentive program that rewards client service excellence, rather than product promotion.
Open a 529 account: A 529 plan offers a vehicle to save for higher education expenses. Contributions to a 529 plan can grow tax-deferred, and any distributions for qualified education expenses are not subject to federal taxes. In addition to the federal tax benefit, many states offer a state income tax deduction for contributions to their plans as well as state income-tax free withdrawals for qualified distributions (restrictions apply so be sure to carefully review the applicable disclosure booklet and consult with your tax advisor).
Investors interested in 529 plans managed by TIAA-CREF Tuition Financing, Inc., a TIAA-CREF affiliate, can click here:
http://www.tiaa-cref.org/products/education/index.html
Pay down credit card debt: Investors who are on track with retirement and higher education savings can put their refund to good use by paying down or paying off credit card balances. Interest rates charged by many cards means consumers with balances often pay much a much higher amount than their original purchase.
Establish an emergency fund: An emergency fund equal to several months' salary can help prevent using a credit card or requiring a loan to pay for surprise repairs, health care costs or living expenses in the case of a job loss.
Fully fund an employer-sponsored retirement plan: If you have already established an emergency fund, directing your rebate to it can free up the funds originally allocated to it which can then be used to increase funding to your employer-sponsored retirement plans, such as a 401(k) or 403(b). Money invested in those plans comes from pretax dollars, and can grow tax-deferred until it is withdrawn. In addition, many employers offer to match a portion of employees' contributions to the plan.
In 2008, eligible employees can contribute as much as $15,500 to either a 401(k) or 403(b), and up to $20,500 for workers over 50.
About TIAA-CREF
TIAA-CREF (www.tiaa-cref.org) is a national financial services organization and the leading provider of retirement services in the academic, research, medical and cultural fields with more than $435 billion in combined assets under management (12/31/07).
1 Workers who earned at least $3,000 in qualifying income during 2007, but paid little or no income tax, would qualify for checks of $300 for individuals or $600 for couples filing joint tax returns. Qualifying income includes wages, Social Security benefits and payments to disabled veterans or their survivors. The Senate expanded the definition in the House version of the bill, allowing an estimated 20 million senior citizens and 250,000 disabled veterans to qualify for checks.
Workers and others who paid income taxes last year on wages or investment income would receive checks of up to $600 for individuals, $1,200 for couples. Payments would phase out for individuals with more than $75,000 in adjusted gross annual income and couples with more than $150,000. Childless individuals with incomes of more than $87,000, or $174,000 for couples, would get nothing.
Anyone qualifying for a check would receive an additional $300 for each dependent child under age 17.
Consider the investment objectives, risks, charges and expenses before investing in a 529 Plan. Please visit www.tiaa-cref.org for a Disclosure Booklet containing this information. Read it carefully.
Before investing in a 529 plan, you should consider whether the state you or your designated beneficiary reside in or have taxable income in has a 529 plan that offers favorable state income tax or other benefits that are only available if you invest in that state's 529 plan.
With regard to the 529 plans managed by TIAA-CREF Tuition Financing, Inc., please note that the issuing states, their agencies, Teachers Insurance and Annuity Association of America, and its affiliates do not insure any Account invested in the Managed Allocation Option or 100% Equity Option. There is no guarantee of principal or investment return in these accounts. Account values will fluctuate based upon a number of factors, including general market conditions.
The tax information contained herein is not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding tax penalties that may be imposed on the taxpayer. It was written to support the promotion of the products and services addressed herein. Neither TIAA-CREF nor its affiliates provide tax advice. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.
Investing involves risk, including possible loss of principal.
TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services, Inc., members FINRA, distribute securities products.
You should consider the investment objectives, risks, charges and expenses carefully before investing. Please call 877-518-9161, or go to www.tiaa-cref.org for a current prospectus that contains this and other information. Please read the prospectus carefully before investing.
Annuity products issued by TIAA (Teachers Insurance and Annuity Association), New York, NY. Advice and Planning Services is a division of TIAA-CREF Individual & Institutional Services, LLC. TIAA-CREF Tuition Financing Inc. (TFI) is the Program Manager of several 529 plans.
© 2009 and prior years, Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA-CREF), New York, NY 10017
