Four Ways to Stretch Your Tax Rebate

Most Americans will get a happy surprise in their mailboxes — or their bank accounts — before mid July: cash from Uncle Sam. The Economic Stimulus Act will give most single people a $600 rebate and most married couples $1,200. Parents will get an extra $300 for every dependent child under age 17. (The rebate starts to phase out for single taxpayers whose 2007 adjusted gross income is more than $75,000; the squeeze starts at $150,000 for joint filers.) Most people don't need to do anything to get the money other than file a 2007 tax return.

Here are four ways to stretch your rebate check:

1 Pay off high-interest credit-card debt. Using the rebate to pay off a $1,200 balance on a credit card with an 18 percent interest rate can save you hundreds of dollars in interest. If, instead, you just made the minimum payment on that debt (4 percent of the balance each month), it could take nearly eight years to retire the $1,200 balance and cost you $635 in interest.

2 Increase your retirement savings. If you're not maxing out your 457 contribution, let the extra cash move you closer to that goal. A cool thing about saving pre-tax dollars in a 457 plan is that the government's help eases the sting of setting aside money. That's why a $1,200 rebate check can help you boost your 457 savings by $1,600 with zero impact on your lifestyle. Let's say you up your 457 contribution by $400 a month for four months. At first blush, that would cut your take-home pay by $1,600. But a $1,200 rebate would actually replace 100 percent of your spending power if you're in the 25 percent bracket. Sounds like magic, but if the extra $400 didn't go into the 457 each month, the government would claim $100 of it as taxes. And with compounding, the money can stretch further: Investing $1,600 now will give you an extra $17,000 in your account in 35 years, assuming your investments earn an average of 7 percent per year.

3 Steer the cash to your IRA. If you put $1,200 into a Roth IRA now and your investments earn 7 percent per year, you'll end up with an extra $12,800 in 35 years. Because it's in a Roth IRA, the money may be withdrawn 100 percent tax-free in retirement.

4 Save for your kids' college. A $1,200 rebate stashed in a 529 college-savings plan for a baby can grow to more than $4,000 in 18 years, assuming the investments earn 7 percent per year, and be withdrawn tax-free to pay college bills.

For more information about the rebates, visit the IRS website.