For many Americans, the start of a New Year is the time they find out if they received a year-end bonus. If you are anticipating one, take some time to think about how you want to use this hard-earned money. Consider the ideas below before the money hits your bank account.
Supplement your investment contributions. Consider applying your bonus to an employer-sponsored 401(k), up to the maximum allowable amount. Take advantage of your employer match, if applicable. Alternately, since it’s also wise to diversify your investment dollars, you could apply your bonus up to the amount allowed in your situation to an IRA. Depending on your adjusted gross income (AGI), both 401(k) and traditional IRA contributions may help reduce your annual tax bill as you grow your savings over time.
Set aside funds in a health savings account (HSA). If you have a high-deductible medical plan, you may be able to make tax-deductible contributions to an HSA. The funds grow tax free and roll over year to year. The money can be withdrawn tax-free to pay for qualified medical expenses today and in the future.
Save for education costs. Invest your bonus in an education savings plan to get a head start on future costs related to elementary and secondary school1, college, or trade school. You can open a 529 account on behalf of a beneficiary to fund their future education expenses or contribute to an existing plan. Your contributions may be tax deductible; check with your tax or financial advisor to determine what giving strategy is best for you.
Invest in the stock market. Diversify your investment portfolio by putting bonus money into the stock market. The stock market provides the opportunity to create a balance of active and passive management that fits your financial goals. Talk to your financial advisor to determine how investing in the stock market can be done to accommodate the timeline of your goals (e.g., vacation, kitchen remodel).
Build emergency reserves. If you don’t already have an emergency fund, consider using this year’s bonus to get one started. Open a separate savings account for this purpose, if you want to reduce the temptation of using it for non-emergency purposes.
Give to the causes you care about. It’s rewarding to give to others. Put your bonus to good use by investing in the community agencies that are important to you. Most nonprofit organizations rely on the generous support of donors to provide the services they offer. As added incentive, you may earn a tax deduction if the organization you fund has tax-exempt status.
Fund your personal growth. Consider investing your bonus dollars in a learning experience, physical activity, or hobby that’s been on your wish list. Perhaps you’ve been meaning to learn a new language, join a pickle ball league, or buy art supplies. Applying bonus dollars toward meaningful experiences can energize you personally and pay dividends at home and at work.
Receiving an annual bonus is a testament to how hard you worked last year, and you should feel confident in how you decide to use it. A financial advisor can work with you to review your goals, investments, risk tolerance and other factors and help you make the right plan.
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