How to Get The Most Out of Your Bonus

If you’re lucky enough to receive an annual bonus you might be torn on what is best to do with the money. Bonus money presents a saving opportunity but the experts at Broussard Poché, LLP need you to be aware of the potential pitfalls.

Bonuses Are Taxable

Bonuses are considered supplemental income by the IRS. This means they could be withheld differently than your regular salary. The IRS suggests a flat withholding of 25% from bonuses, and many employers follow that guideline.

Some employers use the aggregate method, where your bonus is added to your regular paycheck, like a raise. This could move you to a higher tax bracket. It’s important to contact your tax professional for advice on how to deal with the implications, you could lose deductions and pay a higher percentage.

Once you know how you will receive your Bonus, it’s time to decide what to do with it.

  • Contributing to your 401(k) may be an option. But check with your employer about how bonuses are handled. In some cases, your company may not allow you to make 401(k) contributions using your bonus. If you can, remember, you can’t contribute more than the annual limit, so be sure to check how much you’ve contributed for the year to date and also be aware of how much your employer might match.
  • Depending on your income and whether you or your spouse is participating in a company retirement plan, you might be able to reduce your taxable income further by contributing to your flexible spending account this year like a health savings account or a traditional or Roth IRA.
  • If it’s not possible to put your money only into tax-deferred accounts, spend it. Consider investing in a well-diversified portfolio. This might be the gift that keeps on giving, you can create an additional source of cash flow that adds to your quality of life.

Bonuses bring opportunity and questions; it’s important to know the basics before making any decisions. Our experts at Broussard Poché, LLC can help you work through the questions surrounding your bonuses, so you don’t leave money on the table.