Last Updated on April 22, 2021
IRA Financial’s Adam Bergman Esq. discusses the smartest ways to spend your year-end bonus if you were lucky enough to get one this year.
If you were lucky enough to get a year-end bonus in 2020, congratulations. You are already ahead of so many people. Not everyone will have the same opportunity. However, this podcast shows what you should do if you do get your hands on some extra cash in a given year. Of course, as retirement planning specialists, we generally recommend to save that money. 2020 was a unique year, so Mr. Bergman has some other thoughts on what to do with those funds as well.
The Year-End Bonus
A year-end bonus is always a welcomed bump in pay; a reward for a job well done. Obviously, taxes are due on any bonus money you receive. However, they are taxed differently than your regular salary. Instead of adding it to your ordinary income and taxing it at your top marginal tax rate, the IRS considers bonuses to be “supplemental wages” and levies a flat 22 percent federal withholding rate.
If you need money now, because you have been affected by COVID-19, you need to take care of you and your family first. If you’re doing okay, spend some of it on yourself, your spouse or kids. It’s been a rough year for all of us, no matter if you got a year-end bonus or not. Even if you don’t have a lot of spare cash, do something for yourself – even just to treat yourself to a nice dinner. You deserve it! There are some smart ways to spend that money, which Mr. Bergman shares in this podcast.
Smart Moves You Can Make
The first thing to figure out is if taxes were indeed held out. Not all companies withhold the taxes (or not enough). Therefore, it’s important you realize there may be tax consequences of your bonus. Next, do you have an emergency fund? Set aside a few thousand dollars to cover unforeseen major expenses, ranging from car repairs to a new roof or even pet surgeries. A good rule of thumb is to have three to six months of living expenses in that fund.
Time to look at where your money is going. Knock off a chunk of high-interest rate credit card debt and amounts owed on home equity lines of credit, especially if any new debt was incurred to pay for holiday expenses. Interest charges alone can eat up hundreds of dollars each month. We all know it’s important to pay off those cards as quickly as possible. A year-end bonus will help with that.
Map out projected expenses for major items. Begin allocating enough money for 2021′s big-ticket expenses, such as property taxes, home improvement projects and vacation plans. Hopefully, that last one is in your future. Everyone could use a nice, long vacation right about now!
Of course, we highly recommend putting aside money for your retirement. It’s not too late to contribute money into your IRA or Solo 401(k). You have until Tax Day to fund those plans for 2020. Plus, you can start contributing money for the 2021 taxable year. We know 2020 was a year to forget, but you should get back on track with your retirement savings.
Aside from the usual retirement plans, you may want to consider a Health Savings Plan (HSA) or a 529 Plan for education savings.
If your employer offers a healthcare flexible spending account, an HSA could be a smart investment. It’s a pretax benefit account you can use to cover a variety of healthcare products and services, from acupuncture and physical therapy to vaccines and over-the-counter medicine
As tuition costs climb, saving early by starting or contributing to a 529 college education savings plan is one of the most important decisions any parent can make. A 529 plan is a college savings account that’s exempt from taxes. Many states also offer tax benefits for those contributing to 529 plans.
Outside of Retirement
There are lots of options outside of retirement plans to invest. There are many great robo investment option or individual stock platforms like Robinhood that are easy to operate. If you’ve been living under a rock, cryptos have skyrocketed over the last eight to ten months. Bitcoin has more than doubled it’s all-time price as of this writing at sits at near $40,000. This is up from a 2020 low of under $5,000 last March. Learn how to use a Self-Directed IRA to invest!
Of course, not everyone can set up and account and trade stocks, and buy & sell cryptos. Work with a financial advisor (if you don’t have one already) and come up with a plan. Once you have one in place, stick with it!
Stay the Course
As a rule of thumb, for every $1 million of investments in your nest egg, you can expect to withdraw an estimated $40,000 per year, before taxes, for 30 years. Your investment portfolio, plus Social Security and – if you’re lucky – pension income, are the key elements for a financially independent retirement.
Your year-end bonus may just be a drop in the bucket. However, as the saying goes, every little bit helps. As Mr. Bergman mentions, do something for yourself and your family first. After that, be smart with your money and make sure you are on track.
As always, we appreciate you listening and be sure to check us out on SoundCloud, with over 250 episodes of Adam Talks!