If you're lucky, you've gotten your tax rebate check under the federal government's stimulus plan. As you know by now, eligible couples get up to $1,200; singles, $600; families, an extra $300 per child.
Ever since it was first announced, people have thought about what to do with this extra cash. Many of them, wary of economic conditions and their own finances, will pay down debt or build some cash reserves. But there's little doubt that sales of flat-screen televisions, patio furniture, and laptop computers will be up considerably over the next few months. Indeed, retailers have been planning promotions around the stimulus payments for months.
Last month, Sears Holdings (Nasdaq: SHLD) put together an intriguing offer for consumers. Recipients of stimulus payments can bring in their checks to Sears or Kmart stores and receive a 10% bonus by converting the entire amount of their check into a gift card. Other retailers followed with offers of similar bonuses, check-cashing fee waivers, and coupons.
Banking free money
An instant 10% on your money is a good return. If you were going to shop at those stores anyway, then the offers put money back in your pocket. On the other hand, if you end up using your gift card to buy things you don't need, then the offers won't benefit you.
Similar 10% offers from Kroger (NYSE: KR), SUPERVALU (NYSE: SVU), and other supermarket chains are a little more intriguing -- after all, everyone has to eat, and groceries are hardly an impulse purchase. Customers putting a $1,200 payment on a gift card will be able to purchase $1,320 worth of groceries. If you spend about $100 a week, the card should last about three months.
On an annualized basis, the return is quite a bit higher than 10%. When you crank through the numbers, putting up your $1,200 rebate check initially and then getting $1,320 in groceries over the next 13 weeks yields a return of 1.63% per week, or about 132% on an annualized basis.
Let your employer match the government
But you can do even better. By trading your tax rebate for the gift card, you'll be able to use the card to cover all your grocery costs for the next three months. That means you can take the money you'd normally spend at the grocery store and contribute it to a 401(k) or other deferred-tax retirement plan instead.
What's more, you'll be able to contribute more than $1,320. Assuming a 25% tax rate, you'd have to earn $1,760 pre-tax to take home $1,320. Because of the tax benefits of a 401(k), contributing that $1,760 should leave you with the same amount of leftover cash after those three months are over.
And if your employer matches retirement contributions, you'll get even more. If your employer matches half your contributions, then you'll have a total of $2,640 more in your 401(k) account. And if you have a full 100% match, you'll end up with $3,520 -- almost triple your original stimulus check.
Of course, most of the impact in this analysis comes from the tax benefit and company matching, which are generally available any time you make a contribution. But by taking advantage of your stimulus payment to boost your retirement savings, you can see the value of using these plans to build wealth -- and it makes a great excuse to review your own financial plan as well.
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