Put your stimulus check to good use

For those who can, best to use relief funds to prepare for the future

By John Chartier

April 19, 2021

For the nearly half of Americans who say they are financially struggling a year into the COVID-19 pandemic, the American Rescue Plan signed into law on March 11 could not come soon enough.

Providing new $1,400 stimulus checks for older, dependent children, the legislation is welcome relief. Additionally, the law includes enhanced child tax credits from $2,000 to $3,600 per child for those with incomes under certain thresholds.

'For Americans fortunate enough to still be employed and comfortable covering their basic necessities, this $1,400 check will likely serve as a windfall,' says Harry Dalessio, head of Institutional Retirement Plan Services at Prudential. 'It provides a unique opportunity for them to use this 'free money' to improve their financial security.'

Dalessio and James Mahaney, vice president, Strategic Solutions at Prudential, offer these tips for making the most of these funds:

1. Contribute more to your workplace retirement plan or individual retirement account

'This is incredibly important-especially for those who are leaving money on the table by not contributing enough to get a company match,' Dalessio explains. A Prudential survey found that 72% of American workers identified a lack of retirement savings as their top barrier to financial security.

Another option is to invest in a Roth IRA, adds Mahaney. Roth IRAs offer additional flexibility, especially for younger individuals, since all investment growth is potentially tax- and penalty-free once it's been in place for five years.

'You can tap a Roth IRA for up to $10,000 for your first home. And, once you turn 59½, you can make tax-free withdrawals for a child's college education or generate tax-free retirement income,' Mahaney notes.

1. Set the $1,400 aside for a future emergency

'While you may be employed right now, you can't predict the future, so it's important to be prepared and build financial resilience now,' Dalessio says. He also notes that even during the pandemic, an emergency could be as simple as your car breaking down or a pipe bursting in your basement. Given that the pandemic induced 1 in 4 American workers to reduce or exhaust their emergency savings, putting money aside takes on added urgency.

1. Pay down debt

Paying down debt is also a good move, says Dalessio, suggesting that those who can afford it should consider using all or a portion of their $1,400 stimulus check to do so. 'Start with high-interest debt first, such as credit card debt,' he suggests.

According to Mahaney, paying off a loan charging 4% interest is a solid alternative to opening a savings account or a bank certificate of deposit that is earning just 1.0%-1.5% interest.

Those with federal student loans still have an option not to make payments until Sept. 30, 2021 without accruing interest, so using all or part of your stimulus check to reduce any student loan balances is another good option, Dalessio notes.

For those with younger children, Mahaney suggests contributing to a college 529 plan. Future withdrawals for qualified educational expenses from a 529 plan are tax-free.

'You can even start saving for future children by naming yourself as beneficiary and switching it to them down the road,' Mahaney says.

1. Consider an individual life insurance policy

'As COVID-19 reminds us, we can't control threats to our health and well-being, and many who get sick either can't medically qualify for a life insurance policy in the future, or are forced to pay higher rates,' Mahaney explains. 'It may make sense to spend a few hundred dollars a year to buy a term life insurance policy to lock in your insurability while you are healthy.'

1. Qualify for higher Premium Assistance Tax Credits

Some early retirees who are not yet eligible for Medicare and are using a state or federal health insurance exchange might benefit from taking more Roth IRA withdrawals for income, instead of taking traditional IRA withdrawals, to get their income low enough to qualify for the enhanced Premium Assistance Tax Credits in 2021 and 2022, suggests Mahaney. This step may also keep current Social Security benefits from being taxable.

'Strategically leveraging the stimulus check is just one way for workers to improve their financial standing,' says Dalessio. 'Consider other opportunities during the year to set extra dollars aside or increase your retirement plan contributions.'

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