As bonus season rolls around, many of us face the exciting (and sometimes overwhelming) decision of what to do with extra funds. Should you plan for retirement, invest, pay down debt, or treat yourself?
Tell us a little bit about ARIS.
Alliant Retirement and Investment Services, or ARIS, is a full-service financial planning firm located within Alliant Credit Union. Our main priority is helping clients with their investing needs. That tends to lean toward retirement planning for most people, but we also help with education planning, estate planning, or just plain investing!
What is the best way to balance saving, investing, and spending a bonus?
We always prioritize an emergency reserve account first. Stock-based investments are generally investments made for the long term. Once you have about six months of living expenses saved for an emergency, we would feel more comfortable investing money for you. If a small emergency in your house would cause you to have to sell investments in the market, that would be a bad outcome for everyone involved.
Are there tax-efficient strategies for managing a bonus?
It really depends on what the individual is saving for. If it’s long-term savings, then yes, we would absolutely recommend looking at Roth or Traditional IRA options. However, if the money is being saved for more near-term use, then we would need to keep the money in a taxable account that is accessible. We are always mindful of tax consequences and will never put a client’s money into something without fully covering the tax consequences of that investment.
How can someone use a bonus to improve their long-term financial health?
This is a great reason to see one of the Financial Consultants at ARIS. Basic financial planning has us looking at exactly these types of scenarios. For instance, if someone is carrying debt and is intent on paying that debt down as quickly as possible, we work on strategies to accomplish that goal as quickly as possible. For most Americans, debt is generally bad. I’ve had far too many clients come into my office over the years so proud of mortgage debt because of a tax write-off. Laws have changed significantly around what is eligible for a tax deduction, especially around real estate. Most Americans would certainly be in a healthier financial position if they had less debt, and we love to find ways to help our clients pay down debt.
What are some smart ways to invest a bonus, given current market conditions?
The only thing constant about the market is change. I’ve been in this business for 25 years, and the average tenure of our Financial Consultants is about that long. Timing the market is a bad idea, but we have strategies that aim to minimize the risk of deploying all your money into the market at once and running the risk of having that be at a “bad” time. If someone is investing long-term money in the market, hitting a specific day 15 years prior will have little impact on the life of that investment.
How should someone approach using a bonus for a major financial goal, like a home purchase or education?
We never invest money for anything without a specific plan being established beforehand. Sometimes, it might be better to focus on paying down a debt, and sometimes, the market will be a more attractive option. Whether you get a good tax refund from the government or a bonus for your job, that extra income can either be used to better your financial situation or not. Paying down debt or investing the money for the future are both paths to a better financial future. I also think too many people approach that decision as an all-or-nothing situation, which is also a mistake. We want people to have fun along the way; coming up with a strategy for a percentage of the bonus that they will use to better their financial self, while also using a part to better their mental health with a much-needed vacation is always a winning combination.
How can a bonus be leveraged to boost retirement savings?
The answer to this question is really all about strategy. Investing that extra money in a 401k is an option to consider. However, a client would have access to unique investment strategies unavailable within a 401k. The other consideration is access to funds. When money is invested in a 401k or IRA account, the age 59.5 becomes pretty important, as that is the date you can generally take money from an IRA without a 10% early withdrawal penalty. So, if someone doesn’t want to put money away for the long-term, and instead they have education planning needs or just non-IRA investing desires, then we can certainly help.
What are the benefits of making a lump-sum retirement contribution with a bonus versus spreading it out over the year?
We love the dollar cost averaging strategy, especially when it comes to personal Roth or traditional IRA accounts. It’s how I started my very first investments when I started working. I started with $50/month into a Roth IRA with American Funds. I still have that account today, 25 years later. As I grew older and earned more money, I continued to increase that automatic investment until I had maxed out my contribution limit for the year.
Are there specific retirement saving strategies for high earners receiving large bonuses?
There are certainly different strategies for different levels of investors. For instance, in 2025, if you file as a single taxpayer, you can only invest directly into a Roth IRA if you make less than $150,000, and $236,000 if you file jointly. However, there is a strategy for income earners above that level, called a back-door Roth IRA, that would still allow high-income earners from participating in a Roth IRA.
What are some common mistakes people make when allocating their bonus toward retirement, and how can they avoid them?
The biggest mistake people make is procrastination. Most people spend hours and hours planning their annual family vacation, but most don’t take one hour per year to sit down with a professional to see if they are on the right track. The sooner you see someone that can help you confirm that all-important question of, “will I have enough money to retire someday?” the better you will feel.
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Please note: The content in this article should not be considered tax, legal or investment advice or an investment recommendation. Consult your financial professional for personalized advice that is tailored to your specific goals, individual situation, and risk tolerance.
All investments involve risks, including possible loss of principal.