As new $1,400 stimulus checks start arriving, some people may be asking why they received less than they were expecting — or no money at all.
This third round of direct federal payments was authorized by Congress and President Joe Biden earlier this month through the $1.9 trillion American Rescue Plan.
As with the first two checks, the payments are based on the same income thresholds. So individuals with up to $75,000 in adjusted gross income – or heads of household with up to $112,500 or married couples who file jointly with up to $150,000 – qualify for full payments.
This time, however, the payments phase out more quickly for people above those thresholds. If your adjusted gross income exceeds $80,000 and you’re single — or $120,000 as a head of household or $160,000 for couples — you will not receive any money.
However, there are certain moves you can still make that would affect your adjusted gross income — and therefore your eligibility — for a $1,400 payment.
It all comes down to your retirement savings.
Keep in mind, this only works if you have some financial flexibility.
Many Americans are counting on the $1,400 checks to keep them afloat, as individuals and families cope with challenges such as unemployment, eviction risks or food insecurity.
On the flip side, others find the $1,400 payments to be an extra bonus after a year of reduced spending and uninterrupted income.
For those in the latter situation, who are on the cusp of eligibility based on their income, a couple of retirement savings strategies could potentially help make a difference.
Invest in an IRA
The new $1,400 stimulus payments will be based on either 2019 or 2020 federal tax returns.
The IRS will use 2020 returns as long as they have been submitted and processed. The agency has said it will look at potentially topping up stimulus check payments for taxpayers whose 2020 returns show a drop in annual income from 2019.
The deadline for submitting 2020 tax returns has been extended this year to May 17 from the usual April 15 date.
The IRS has not yet confirmed whether the deadline for IRA contributions will also be May 17. However, Ed Slott, CPA and founder of Ed Slott & Co., said he thinks the IRA deadline will be extended based on the language in the tax code and how the IRS has handled similar changes in the past.
Contributions to a traditional IRA generally can be deducted. Roth IRA contributions are not deductible.
If you are single and your income is right around the $80,000 cap, you could consider fully funding the maximum amount in a traditional IRA — $6,000, or $7,000 if you are age 50 or over.
Your ability to deduct those contributions will vary depending on your income and whether or not you also have a retirement plan at work.
That could change your eligibility for the $1,400 stimulus check, according to Slott.
A married couple who file jointly and have adjusted gross income around the $160,000 cap for the stimulus checks could each set aside $6,000 in a traditional IRA, or $12,000 total, Slott said. That could bring them under the $150,000 threshold for full stimulus checks. If they also have two children, their total payment could be $5,600.
“You can use an IRA deduction to still change last year’s income,” Slott said, adding that other options are limited. “There’s very little you can do to change last year’s income now without a time machine.”
Increase 401(k) contributions
Alternatively, you could choose to save in accounts this year that reduce your taxable income.
That way, when you file your taxes next year, you may be available to claim this year’s stimulus check.
Just like this tax season, there will be a credit available to anyone who missed out on the $1,400 stimulus checks next year, according to Garrett Watson, senior policy analyst at the Tax Foundation.
For example, take a single filer who earns $80,000 and didn’t contribute to a retirement account last year. Every dollar they put into a 401(k) this year will reduce their adjusted gross income. If they put $5,000 in, they would then become eligible for the full $1,400 stimulus payment, Watson said.
Other people who are also on that cusp may want to use the 401(k) to put aside up to $19,500 this year if they max out their contributions. (People ages 50 and over can put away another $6,500 in catch-up contributions.)
Of course, not everyone can afford to set aside that much money, Watson said.
“You have to have the margin to be able to save that much and not touch it,” he added.
There are also certain limitations. If you have a 401(k), your ability to also deduct money that’s put in a traditional IRA will be more restricted.
Another option is a tax-deferred health savings account, provided you have a high-deductible health plan at work. That would also help reduce your adjusted gross income when you file your taxes next year, according to Watson.
