If you’re one of the more than 35 million families that started receiving monthly payments for the child tax credit last month, you may be wondering what to do with your newfound surplus. The payments are part of COVID-19 relief legislation that was passed earlier this year and aims to help middle-class families with the costs of raising children.
If you’re fortunate enough to have money left over after covering the necessary costs of childcare, here are some things you can do to give your financial life a boost.
What is the monthly child tax credit?
The child tax credit payments are part of a program hoping to lessen child poverty in the U.S. and turn an annual tax refund for families with children into regular monthly income. Eligible families started receiving payments of up to $300 per child on July 15 and will continue to receive monthly credits through the end of 2021.
The total annual credit is worth $3,000 for children aged six through 17 and $3,600 for kids under six. Prior to an expansion of the program, the credit had been worth $2,000 for children 16 and under. The additional payment amount begins to decline at incomes of $75,000 for individuals and $150,000 for married couples.
What should you do with the money?
The first thing you should use the money for are any expenses that you can’t cover through your regular income. The program’s intent is to help families handle the additional expenses that come with raising children such as clothes, food or school supplies.
If you’re able to cover those costs and you find you have extra money from the tax credit, consider starting an emergency fund or giving existing savings a boost. Most experts suggest having three to six months of expenses saved, so you can manage through an unexpected life event without having to borrow money. Building an emergency fund is a key first step in any financial plan.
If you are already comfortable with the savings in an emergency fund, you might consider investing a portion of your monthly payment. Here are some options to consider.
5 ways to invest your monthly payment
1. High-yield savings account
If you’re unsure about where to start when it comes to investing, a high-yield savings account can be a great place to begin. These accounts allow you to have regular access to the money in case you change your mind or have other needs arise. Your return will be modest, but it’s still better than you’d see from a traditional savings account or checking account.
2. IRA or Roth IRA
An individual retirement account (IRA) can be a great way to save for retirement beyond what is offered by your employer. Consider opening a Roth IRA, which will allow contributions to grow tax free for decades and you won’t pay taxes on your withdrawals during retirement either. You can use the IRA structure to invest in individual stocks as well as mutual funds and ETFs.
3. 529 plan
If you’re interested in getting started on saving for your children’s education, a 529 plan can help you save in ways similar to an IRA. A 529 plan is a tax-advantaged account that will allow your contributions to grow tax-free. When it comes time to pay for educational expenses such as tuition and books, withdrawals from the plan will not be subject to taxes. Traditionally, these plans have helped families pay for college expenses but they can also pay for K-12 private school costs.
4. 401(k) boost
You could also use the extra savings to boost your contributions to your 401(k) or other workplace retirement plan. If you aren’t already receiving the full amount of any matching contribution offered by your employer, your additional contributions could go even farther if they’re also matched by the company. Employer matches are sometimes referred to as “free money,” so you want to make sure you’re taking full advantage of them as soon as you can.
5. Online brokerage account
If you’re excited about investing your additional savings from the child tax credit, but aren’t sure you want to commit the funds to a retirement account like an IRA or 401(k), an online brokerage account can be a happy medium. You’ll be able to invest in a variety of securities such as stocks, bonds, mutual funds and ETFs, while also still having access to the money if something should come up.
While withdrawals from 401(k)s and IRAs typically come with penalties if they’re made before retirement age, you’ll be able to sell assets in brokerage accounts whenever you’d like, though you’ll owe taxes on any gains.
Use your monthly child tax credit payment to cover expenses that you can’t handle otherwise. If you have savings left over, consider building your emergency fund or giving a boost to your retirement savings through an IRA or 401(k) plan.