Getting a year-end bonus? Here are some things to consider.
Many companies pay annual discretionary bonuses to employees, either at year’s end or in the first few weeks of the following year. You may have been receiving a bonus for years now (possibly your entire career), and while no one takes a large sum of money for granted, it is always helpful to have a reminder of some of the practical things to do with your bonus.
Don’t forget about the tax
Like other earned income, annual bonuses are subject to income tax – sometimes at a higher rate than usual if you receive a lump sum. Often you can recover some of that tax upon filing your income tax return. Employers who maintain a registered retirement savings plan (RRSP) may allow employees to contribute their bonus into the workplace RRSP (subject to annual limits and your personal contribution room) before it’s taxed, which is an attractive option to keep more money working for you.
Invest for your future
It takes discipline to put your hard-earned bonus into an RRSP or Tax-Free Savings Account (TFSA) instead of buying that new TV or spending a few days at a warm destination in the middle of winter. However, it’s important to invest for your future and save for retirement. Consider putting a small percentage of your bonus towards something enjoyable and investing the rest. Since year-end bonuses are often already factored into annual compensation programs, treating it like one big paycheque can help you allocate it as you would any other paycheque.
It may not seem like the most “fun” way to spend your bonus, but putting money towards paying down debt has its benefits. Whether it’s your mortgage, credit card or some other loan obligation, decreasing debt will serve you well in the long term. While interest rates have remained low for the past several years, and may continue to stay low, the money you save in interest payments can be invested to help you achieve your longer-term financial objectives.
Where you choose to allocate your bonus dollars is an important decision, and certainly one you don’t have to make on your own.
Call our office today and we can talk about the best way to put your bonus to good use.