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How to Get More Stimulus Money by Funding Your 401(k)

By Robin Hartill, CFP® - Mar 25, 2021 at 5:30AM

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Your 401(k) could be your golden ticket to extra stimulus cash next year.

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.

A man holds information about stimulus checks.

Image source: Getty Images.

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.

Increasing 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.

But increasing 401(k) contributions could really be a boon to people with dependents. Let's say you're married filing jointly with two dependents. Your combined income is $160,000, so you didn't qualify for any stimulus money. If you can lower your combined income by $10,000 through 401(k) deferrals, you'd get a $5,600 stimulus credit next year, since the payment for each dependent is also $1,400.

Your marginal tax rate is 22%, so you'll save another $2,200 on taxes. That's an automatic $7,800 in your pocket next year at tax time -- essentially a guaranteed 78% return on your $10,000 investment. The more dependents you have, the more you could potentially benefit from increasing your contributions.

How much can I contribute to my 401(k)?

The 401(k) contribution limit for 2021 is $19,500 for people under 50. Workers 50 and older are allowed to make a $6,500 catch-up contribution, so their limit is $26,000. Employer matches don't count toward these limits.

Who can't get more stimulus money from a 401(k)?

If your income is drastically above the limits for stimulus checks, you won't be able to qualify by increasing your 401(k) contribution. For example, a single person under 50 earning $100,000 couldn't qualify, even if they maxed out their 401(k) contributions. That would still leave them with $80,500 of taxable income.

If you qualified for a full $1,400 payment, you won't get more stimulus money for increasing your 401(k) contribution. But that doesn't mean you shouldn't contribute more if you can afford to. A stimulus check pales in comparison to the returns you'll earn over time.

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