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Turn Your Stimulus Check Into Tax-Free Wealth – Episode 281

Adam Talks

In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. discusses the latest stimulus package and how, if you can afford to do so, you can turn that into tax-free wealth at retirement.

The American Rescue Plan, which was signed into law by President Biden, is the latest help the government has given Americans. Included in the package, were another round of stimulus checks for Americans who greatly need the extra funds. These checks are used to offset expenses for those hit especially hard financially during the COVID-19 pandemic. If you are one of the lucky ones, you might not need this stimulus to pay your bills. If that’s the case, it might be a smart idea to put aside money for the future. In this episode, Adam talks about the best option to put the unneeded cash.

Who Gets a Stimulus Check?

One of the holdups of the plan was exactly which Americans qualify for stimulus. In the end the compromise was to send the full $1,400 checks to single Americans earning less than $80,000 and doubled that for those married filing jointly. If you file as a head of household, you will not receive a check if you earn over $120,000.

Further, all qualified children are considered, even those in college, and will receive the $1,400 stimulus check as well. Therefore, a couple earning $75,000 with three dependent children will receive $7,000 ($1,400×5). If you are above the income threshold, a nonresident alien, do not have a social security number, or the IRS simply doesn’t know about you, you will probably not receive a check.

Obviously, those hardest hit financially will need to use the funds to put food on their table, pay bills and take care of health expenses. Everyone should use the funds to take care of their loved ones first. If you have money leftover, or do not need it to cover the basics, there are things you can do.

What Can You Do with Those Funds?

Many Americans have breezed through this pandemic without much change financially. If able to, many have started working remotely. Plenty of career-oriented single men and women, who have built a nice bank balance, don’t precisely need this stimulus at this time. Of course, no one is going to say no to free money! So what can you do with these funds, especially if you are unwilling to travel, dine out or attend gatherings with large crowds?

Invest! Save! Plan for retirement! The markets have bounced back tremendously since the onset of the pandemic. Alternative assets, such as real estate, cryptocurrencies and NFTs have seen strong demand and higher prices. Why not put your stimulus checks to work for you! The most tax-efficient way to invest is by utilizing retirement accounts. Because the government funds are not taxable, funding a traditional plan is not the best use for them. There is no upfront tax break, which is the main benefit of a traditional IRA or 401(k) plan. It’s time to go Roth!

What is a Roth IRA?

A Roth IRA is funded with after-tax funds, so there is no immediate tax break. However, all qualified distributions are tax free! To be qualified, the distribution must be taken after you reach the age of 59 1/2 and any Roth IRA has been open for at least five years. We always suggest you fund a Roth as soon as you have earned income. This gets the clock started, and you can put away funds in the plan whenever you want. That way, once you hit age 59 1/2, you can withdraw from the plan and not owe taxes.

What if you don’t want want those funds tied up for the next 20 or 30 years? The beauty of the Roth IRA is that all contributions can be withdrawn at any time and for any reason. Therefore, if you receive $2,800 in stimulus funds, and contribute it all to a Roth, you can withdraw that amount whenever you want. Over the years, those funds will grow via earnings and/or profits from your investments. Those earnings cannot be touched until you reach the milestones mentioned earlier. If you do decide to withdraw them early, they will be taxable and be subject to a 10% early withdrawal penalty.

Self-Direct Your Roth IRA

Depending on the type of investments you want to make, this will determine what type of plan you need. Most financial institutions offer Roth IRA plans. However, they are not all the same. Opening up a plan at your local bank will limit the type of investments you can make. Generally, they only permit traditional assets, such as stocks, bonds and mutual funds.

However, if you wish to invest in alternative, or non-traditional, investments, you need to self-direct the plan. By doing so, you can use your stimulus check to invest in anything you want, except collectibles, life insurance or a transaction involving a disqualified person. Further, by using a Self-Directed Roth IRA, all gains generated will be tax free. And of course, if you ever need emergency cash, you can withdraw those contributions whenever you want, tax- and penalty-free.

Obviously, you won’t be able to turn a $1,400 stimulus check into millions. But, with enough time and some smart investing, you can turn that payment into $20-30,000 when you hit retirement age. Taking care of yourself and family is paramount. However, if you can afford to invest, look no further than the Roth IRA!

Thanks for listening to another episode of Adam Talks. Be sure to check out the IRA Financial podcast network for all of our podcasts and visit us on SoundCloud when you are on the go. You can also fund us on iTunes, Spotify and other popular services. Invest wisely and speak with a financial planner if you need advice on where to invest.


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