Some 39 million households, representing nearly 90% of American families, will benefit from the enhanced child tax credit. The Internal Revenue Service will distribute the payments in the middle of each month, July 15 through December 15.
Eligible parents with children under six will receive $ 300 / month per child while parents with children aged 6-17 will receive $ 250 / month per child.
Millions of parents will see money as a financial lifeline. The money could potentially cut child poverty in half when combined with other federal cash assistance, some researchers say.
CTC money could potentially cut child poverty in half when combined with other federal cash assistance, the researchers said.
But just like the government’s previous COVID-related stimulus payments, some parents will view the payments as a godsend. Seth Mullikin, director of Lattice Financial in Charlotte, NC, says it’s a “good deal to have.”
Mullikin and other financial advisers point to some savings and investment measures to help children pay for their education – and even prepare for retirement. They might also give your child the first crash course in financial literacy, they add.
The tax credit has been around for decades, but the US $ 1.9 trillion bailout made significant changes for just one year. It went from $ 2,000 per child to $ 3,600 for children under 6 and $ 3,000 for children 6 to 17 years old.
CTC was previously paid as a lump sum, added to a person’s income tax refund. Half of the total amount will be paid as an advance in monthly installments, for this year only for eligible families.
Surprising Benefits of 529 Plans
Families can withdraw money from a 529 account without paying federal and state income tax in most states, as long as the funds are spent on qualified higher education expenses like tuition. , books and laptops.
A student with a scholarship can still use the money for other costs like accommodation and food. If the intended beneficiary does not go to college, the money can be transferred to another relative.
Catherine Valega of Green Bee Advisory in Boston, Mass., Said such a plan would be a great starting point for families looking for places to deposit their extra CTC money.
At the end of 2020, there were nearly 15 million 529 college savings accounts, according to the College Savings Plans Network.
Like the 401 (k) accounts, 529 accounts are defined contribution plans linked to market performance. How the money is invested depends on risk tolerance and the number of years before entering college.
Many plans offer age-specific investment options that become more and more conservative as the beneficiary approaches college. Another option is risk-based investments, regardless of the age of the beneficiary.
Income from tax-advantaged 529 plans will not be taxed by the IRS or state tax authorities, according to H&R Block HRB,
Contributions to a 529 plan are not deductible from federal taxes.
Even a little helps. Suppose the parents of a one-year-old child deposit $ 3,600 into a 529 plan. With an annual return of 6% and no further contributions, that money will increase to $ 10,275 when the child turns 18, a- he declared.
At the end of 2020, there were nearly 15,529 education savings accounts, according to the College Savings Plans Network, an organization providing information to states that manage education savings plans.
These accounts contain more than $ 425 billion in assets and the average balance was $ 28,679 at the end of the year, the organization said.
Retirement accounts? Yes really
There are different types of custody accounts – accounts parents set up when their children are minors – but Valega and Mullikin say a Roth custodial IRA is a good option for enhanced child tax credit payments.
Traditional IRAs contain pre-tax dollars, so the money is taxed when it is withdrawn. But the money in Roth IRAs is after-tax, so it can be withdrawn tax-free decades from now. What to do with CTC money? Valega says, “Let’s do a Roth.”
Not only does this give an individual the obvious advantage of having a head start on saving for retirement, having such an account can put retirement on your child’s radar and kickstart their retirement planning. retirement.
Would you like your child to impress their classmates with the latest news on topics like IRAs, taxes and compound interest?
Would you like your child to impress their classmates with the latest news on topics like IRAs, taxes and compound interest? “You are going to be light years ahead of all of your peers when it comes to financial literacy,” said Valega.
There are caveats. As Bill Bischoff, Tax Consultant for MarketWatch, explains: “When funds are transferred to the custody account of a minor child at a financial institution or brokerage firm, the funds now irrevocably belong to that child.”
The current maximum annual contribution for a child care account is $ 6,000, or the maximum earned income of a child for the year – whether child care or gardening – depending on the amount. lower, according to Fidelity Investments.
If a child only earns $ 2,000 with a summer job, $ 2,000 is the contribution limit. The money doesn’t have to come directly from the child’s wallet, Mullikin noted. Parents, for example, may decide to match their child’s income with contributions.
Other types of custodial accounts include brokerage accounts, but Valega said parents and children should be careful. A custodial brokerage account is technically the child’s asset, and they oversee it when they are no longer minors.
Some 20% of custody accounts should be made available for college bills in order to qualify for federal financial aid. A maximum of 5.64% of the 529 education savings plans should be made available to colleges to qualify for federal financial aid.
Roth IRAs are not considered an asset by federal financial aid formulas when assessing parents’ ability to afford their children’s tuition, Valega said.
Set up an estate plan
Some parents should consider skipping the CTC money, experts say, as advance payments are subject to income eligibility rules such as $ 75,000 for individuals and $ 150,000 for married couples who jointly deposit.
If the IRS determines that the CTC was overpaid to a family based on its 2021 income, it will deduct the overpayment from the household’s refund in the next tax season or add the amount to the bill. tax.
If you already have a 529 plan and / or custody account for your children, consider creating a will and / or living will for health care decisions, said Gregory Giardino, financial advisor at JM Franklin & Company, based in Tarrytown, NY
Wills can dictate which inheritances, who serves as a guardian of a child, as an estate trustee or who serves as a power of attorney.
Wills can dictate inheritance, who serves as a guardian of a child, trustee of an estate or who serves as a power of attorney. Such documents are “invaluable in protecting your children,” he said.
But many Americans overlook the process. Two-thirds of Americans in a December survey said they did not have a will, and media reports are strewn with stories of wealthy celebrities who died without a will.
Lawyers can charge between $ 150 and $ 600 to draft a will, according to LegalZoom. The cost can go up to $ 1,000, according to the AARP, formerly the American Association of Retired Persons.
“It can create more control and direction over your wealth, should the unexpected happen,” Giardino said. After 16 months of a global public health crisis, many parents might be able to relate to this.