By Kevin Theissen
Nearly 40 million American households have children ages 18 or younger, and last week, they received their first Advance Child Tax credit payment. These families account for more than 30% of the U.S. population.
The amount each of these households receives depends on the children’s ages and the parents’ income. Eligible households should receive $300 per month for every child age 6 or younger and $250 per month for every child between the ages of 6 and 17.
As the name suggests, these credits are designed to equip families with a portion of their 2022 refund in advance of tax season.
“Advance Child Tax credit payments are early payments of 50 % of the estimated amount of the Child Tax Credit that you may properly claim on your 2021 tax return during the 2022 tax filing season,” according to a spokesperson for the Internal Revenue Service. “If the IRS has processed your 2020 tax return or 2019 tax return, these monthly payments will be made starting in July and through Dec. 2021, based on the information contained in them.”
For some families, this money will help cover the cost of basic expenses. For others, the cash is a welcome windfall that could be used to fund a 529 education savings plan. Because these plans offer ways to save and invest for a child’s or grandchild’s education, they are tax-advantaged. Typically, after-tax contributions are invested and any earnings grow tax-deferred. If used to pay qualified education expenses (tuition, books, etc.), distributions are entirely tax free.
- Fund an ABLE account. The Achieving a Better Life Experience Act of 2014 allows Americans with disabilities and their families to save up to $15,000 a year in a tax-deferred account similar to a 529 college savings plan.
- Fund a Roth IRA. It may seem counterintuitive to open a retirement account for a 10-year-old, but any simple online Roth IRA calculator will show that a $3,600 investment, earning 6 % annually, has the potential to grow to approximately $150,000 at retirement by the time a 10-year-old is ready to retire at age 70. If you contributed every year, it could be in the millions at retirement age. But remember: the child must have earned income (a job) to be able to contribute to a Roth IRA.
- Create or enhance a savings account.
Those who prefer a bigger refund next year, even if they qualify for the Advance Child Tax Credit, may consider opting out of the payment. The IRS has a website that can be used to identify your preferences. If you are interested in guidance filing your taxes and/or investing this money in a tax-advantaged account, we’re here to help.
Kevin Theissen is the owner of HWC Financial in Ludlow.
