Near the end of 2017, the President signed into law a tax reform bill that created an opportunity for businesses across the country. As a result, many companies announced that they are providing cash bonuses to employees, payable this quarter. In addition, employees may receive performance-based bonuses or pay increases at this time of year, as many employers are conducting yearly performance reviews.
“While some may see any or all of these as newfound money to spend immediately,” says Rich Guerrini, President & CEO of PNC Investments, there are things to think about for how to use the funds:
Pay Down Debt – During the holidays, people tend to overspend, with much of those purchases being placed on credit cards. In fact, reports are that U.S. year-end holiday retail sales rose 5.5% compared to the same period in 2016[1]
Credit cards can have high interest rates, so to help minimize this, you might consider using the funds to pay down credit card or other debt and start off the New Year in a financially responsible way.
Start an Emergency Fund – A money market account and other appropriate short-term savings vehicles can help provide easy money management and FDIC protection to help you achieve your savings goals. A money market account may be comprised of short-term securities representing high-quality, liquid debt and monetary instruments.
Increase Your 401(k) Contribution – A 401(k) is an employer-sponsored retirement plan that, if your employer offers one and you are eligible to participate, may allow you to invest part of your paycheck before taxes are removed. Many employers will match a portion of your payment to this plan, helping your contribution make even more of an impact on your retirement well-being.
Invest in an Individual Retirement Account (IRA) – An IRA can allow you to invest for retirement on a tax-deferred basis and your contributions may be tax-deductible. The deduction may be limited if you or your spouse are covered by a retirement plan at work and your income exceeds certain levels. For 2017 and 2018, your total contributions to all of your traditional and Roth IRAs for the year cannot be more than $5,500 ($6,500 if you are age 50 or older) or, if you made less than that, your taxable compensation for the year. Roth IRA contributions may be limited based on your filing status and income. Note that Roth IRAs are not tax deductible.
Add to Your Child’s 529 Plan – There is no better time than the present to invest in your child’s education and the new tax reform bill expanded the use of 529 plans to cover expenses for grades K through 12. A 529 plan is a tax-advantaged investment designed to encourage saving for the future higher education expenses of your child or beneficiary. There are two types of plans: prepaid tuition plans that allow you to pay for tuition and fees at designated institutions in advance, and savings plans that are tax-advantaged investment vehicles, which allow you to save for future education costs.
“No matter where your unexpected funds are coming from, if you take time to consider the options, you can ensure that you are putting your money to good use – now and for your future,” Guerrini says.
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