• Wealth Management

Five Strategies to Use a Bonus or Raise

Have extra money coming in? Here are ways to put your money to work for you now, so you can potentially reap the rewards down the road.

Many companies provide some form of incentive compensation as part of their overall compensation package. In fact, 85% of U.S.-based companies paid out bonuses in 2018, according to a recent survey by WorldatWork, an association of human resource professionals.1 Many of these same companies also offer spot bonuses and raises during the year to recognize good work and motivate employees to continue to drive results.

If you’re fortunate to see a boost in your paycheck—whether it’s through a bonus, raise or promotion—it may be very tempting to spend this extra cash on a new electronic gadget or fun vacation, but using your bonus on long-term, big picture goals maylead to greater happiness in the long-run.

What should you do with your extra compensation? Start with the basics. Focus on two important objectives: catching up and getting ahead. Here are five strategies to put your money to work for you now, so you can potentially reap the rewards down the road.

1. Pay Down Part or All Outstanding Debt

If you have debt, such as student loans, car loans or credit card debt, a bonus can be a great way to tackle it aggressively. And if the interest rate on your debt is high, make this a top priority. The money you pay in interest can cost you thousands over time.

2. Boost Your Investment In Your 401(k) and Max Out Other Retirement Accounts

Hopefully, you’re already contributing to your company’s 401(k) retirement account and taking full advantage of any available company match. When you receive a bonus or an increase to your salary, consider increasing your contribution, since the more money you set aside today, the better off you’ll be in the long run, helped by the power of tax-deferred growth potential.

Also consider maxing out other retirement plans, such as a Traditional Individual Retirement Account (IRA) or a Roth IRA. There are a few key differences between the two that you should understand before setting one up or making contributions:

  • Income Limits: Anyone under age 70 1/2 can open and contribute to a Traditional IRA as long as they have earned income; however, with a Roth IRA, there is no age limit but there is an income cap (only married couples with Modified Adjusted Gross Income (MAGI) of $193,000 or less, or a single person with MAGI of $122,000 or less) are eligible to make a full contribution. The maximum annual contribution for both accounts in 2019 is $6,000 (or $7,000 for those age 50 or older).
  • Taxes: Funds within an IRA have the potential to grow on a tax-deferred basis. Contributions to a Roth IRA are made with after-tax money, so you can withdraw the contributions tax-free, penalty-free any time. The earnings can be withdrawn federally tax-free, penalty-free once you reach age 59 1/2 and the account has been open for five years.2 With a Traditional IRA, the contribution may have been deductible or non-deductible.3 Deductible contributions and earnings are taxed when you withdraw them. Non-deductible contributions are not taxable but the earnings are. Withdrawals made prior to age 59 1/2 may be subject to a penalty tax unless an exception applies. 
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Roth IRAs may be particularly well-suited to millennials and those starting their careers because of the ability to withdraw contributions without tax or penalty if necessary. Your Financial Advisor can help you make the best decision for your particular situation.

3. Contribute to a Savings or Investment Plan

If your current financial situation is solid and your debt is under control, consider investing your newfound cash in a savings or investment plan that is earmarked for a long-term goal, like buying a home, but is also available for any short-term emergencies. Resist the temptation to invest in an ad hoc manner. Instead of picking a few hot stocks, follow your long-term investment strategy. Work with your Financial Advisor to help reduce volatility within your portfolio through diversification and asset allocation tactics. 

4. Save Through an Education Savings Plan, Such As a 529 Plan or Coverdell ESA

The average cost of tuition and fees at a private college was $34,740 for the 2017-2018 school year, according to the College Board.4  This expense has continued to rise every year, making saving for your children’s college education a priority.

If one of your long-term goals is to send your children to college, consider allocating some of your new funds towards a savings plan dedicated to covering these expenses. A 529 Plan and a Coverdell Education Savings Account can both be excellent college savings vehicles because they are both tax-free when used for college. There are important differences between the two—specifically age, income and contribution limits—so do your homework before determining which program is best for your family’s needs and goals.

5: Invest in Yourself

If all your necessities are covered and your long-term goals are on track, think about using some of your enhanced compensation to accomplish an important short-term goal. For instance, if you’re focused on making healthier choices, you may want to consider investing in a gym membership or a wellness group. And if you're striving to slow down your lifestyle, you may want to book a meditation retreat or learn yoga. This way, you reward yourself for a job well done, while achieving an important goal.

Making the Most of Your Money

Earning and receiving a bonus, raise or promotion is very satisfying, and can help you advance your financial well-being. Speak with your Financial Advisor about how the money can help you reach your future goals.