How to get more stimulus money by funding your 401(k)

You may find that you’re getting less money than you expected from the third stimulus check or that you’re not eligible at all, even though you qualified in the first two rounds. That’s because the third round has a much narrower phaseout range for people earning above the income limits, which are $75,000 for singles, $112,500 for heads of household, and $150,000 for married couples.

You won’t qualify for any stimulus money if your income is above $80,000 for singles, $120,000 for heads of household, or $160,000 for married couples – no matter how many dependents you have. But if your income is within the phaseout range or just above the limits, there’s a surprising way you could qualify for more stimulus money. Increasing your 401(k) contribution could unlock more stimulus money in early 2022.

How to get more stimulus money with a 401(k)

The third stimulus check is an advance on a 2021 tax credit. But the IRS is processing payments using your 2020 tax return (or 2019 return if you haven’t filed yet) because the goal is to get that money into the economy now. Since it’s a 2021 tax credit, you could still qualify based on your 2021 income next year at tax time. You’d get the extra stimulus money as a rebate next year.

The first two rounds worked the same way. They were 2020 credits based on 2019 returns (or 2018 in some cases for the first check). Some people who didn’t qualify based on 2019 income are now getting more stimulus money as a recovery rebate credit because they qualify based on 2020’s return.

ncreasing your 401(k) contribution could get you more stimulus money because with a traditional 401(k) plan, you’re reducing your income for the current year. You pay the taxes when you withdraw money in retirement. This wouldn’t work for a Roth 401(k) because you contribute post-tax and get tax-free money later on.

Who would benefit from increasing contributions?

Suppose you’re single with an income of $80,000. You contribute an extra $5,000 to your 401(k) in 2020. That gets you a $1,400 stimulus check next year.

Since your marginal tax rate is 22%, you’d save $1,100 on your taxes. So deferring an additional $5,000 – which will grow into even more money over time – gets you an extra $2,500. Not too shabby.  ReadMore

Source : usatoday