Use rebate check to beef up 401(k), Roth IRA

If you make too much to qualify for the maximum rebate in the Economic Stimulus Act — $600 for single filers, or $1,200 for married couples — based on your 2007 income, you get another shot for 2008. Contributing to a 401(k) plan or a flexible spending account, making a tax-deductible contribution to your IRA, or selling stocks or mutual funds for a loss in a taxable account can all lower your 2008 adjusted gross income and boost your rebate.

The law provides a one-time tax credit for 2008, but because it was intended to get money into people's hands as quickly as possible, Congress ordered the IRS to distribute the money immediately rather than wait for people to file their 2008 tax returns. As a result, the IRS used 2007 tax returns as a guide.

Income from Social Security and veterans' benefits count toward the $3,000-minimum-income threshold to qualify for the partial rebate in 2007. But if you still came up short, you can increase your 2008 gross income. For instance, you may be able to sell stocks, bonds or mutual funds for a profit, convert funds from a traditional IRA to a Roth IRA, or take a distribution from a traditional IRA. If you are retired and work part-time, you could boost your hours.

Keep in mind that the rebate itself is not taxable and will not affect the refund you might otherwise receive for 2008. But if you get the maximum rebate this summer, you won't get it again when you file your 2008 tax return.

The purpose of the rebate is to help stimulate the economy. But it wouldn't be totally unpatriotic to use the money to rev up your own finances.

For instance, if you haven't maxed out your 401(k) contributions, now may be the time to do it — especially if you can get free money from an employer match. If you get the full $1,200 rebate, you can actually afford to increase your 401(k) contribution by $1,600 if you're in the 25 percent tax bracket. That's because your contributions lower your taxable income, so investing $1,600 lowers your take-home pay by only $1,200.

Invest that $1,600 now and you'll have an extra $16,000 in your account in 30 years if your investment earns an annual return of 8 percent. And if your employer matches 50 percent of your contributions, you'll be investing a total of $2,400, which could grow to $24,000 in 30 years.

If you qualify for a Roth IRA and contribute $1,200 to your account, you'll end up with an additional $12,000 in 30 years, assuming that same 8 percent annual return. And you'll be able to withdraw the money tax-free when you're 59 1/2 or older and have had a Roth for at least five years.

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Kimberly Lankford is a contributing editor to Kiplinger's Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com.