• Jonathon Allen, CFP®

What will you do with your Child Tax Credit?

Last week, 39 million American households that have children age 18 or younger received their first Advance Child Tax Credit payment.

The Internal Revenue Service (IRS) explained, “Advance Child Tax Credit payments are early payments from the IRS of 50 percent of the estimated amount of the Child Tax Credit that you may properly claim on your 2021 tax return during the 2022 tax filing season. If the IRS has processed your 2020 tax return or 2019 tax return, these monthly payments will be made starting in July and through December 2021, based on the information contained in them.”

The amount Uncle Sam sends depends on the age of the children and the income of the family. Eligible households should receive $300 per month for every child age 6 or younger and $250 per month for every child between the ages of 6 and 17, reported Andrew Keshner of MarketWatch.

For some families, the money will help cover the cost of basic expenses. For others, the cash is a welcome windfall that could be used to:

  • Fund a 529 education savings plan. These plans provide a tax-advantaged way to save and invest for a child or grandchild’s education. Typically, after-tax contributions are invested and any earnings grow tax deferred. If distributions are used to pay qualified education expenses, they are tax free, reported savingforcollege.com.

  • Fund an ABLE account. The Achieving a Better Life Experience (ABLE) Act of 2014 allows Americans with disabilities and their families to save up to $15,000 a year in a tax-deferred account similar to a 529 college savings plan, explained FINRA.

  • Fund a Roth IRA. It may seem counterintuitive to open a retirement account for a 6-year-old, but Bankrate’s Roth IRA Calculator shows that a $3,600 investment, earning 6 percent annually, has the potential to grow to almost $150,000 at retirement by the time a 6-year-old is ready to retire at age 70.

For those who qualify and prefer not to receive payments, the IRS has a website that can be used to manage these payments.