If you were fortunate enough to receive a bonus for the work you did in 2020, John Nersesian, head of adviser education at PIMCO, suggests the following actions:
1. Prepare for taxes
Set aside funds to cover any federal or state income tax liability if the appropriate taxes were not withheld. The minimum withholding must be at least 100% of last year’s liability (110% of your adjusted gross income is above $150,000) or 90% of the current year's amount.
2. Pay down debt
With credit card rates ranging between 12% to 18% APR, paying down these balances provides a great “guaranteed return.” Additionally, this type of debt is non-deductible (compared to mortgage interest), increasing the true out-of-pocket cost.
3. Increase your reserve fund – to a degree
Most financial experts recommend an emergency fund of three to six months of living expenses to cover unforeseen events (loss of a job, medical emergency, etc). However, with current savings rates running well below 1.00%, consider supplementing this with home equity credit lines or securities-based lines of credit to keep more money-earning a positive return.
4. Fund your retirement
The IRA contribution limit for 2020 is $6,000 (plus an extra $1,000 catch-up for those above age 50), and contributions can be made for 2020 through April 15, 2021, or for the current year until April 15, 2022. Your contribution may also be deductible depending on your income and employer retirement plan coverage for you and your spouse.
5. Fund your children’s education
Given the rapidly increasing costs of college, consider funding 529 accounts with your available funds. The maximum annual gift amount is $15,000/year enabling parents to front-load these plans with $75,000 ($150,000 married filing jointly) to avoid gift tax consequences and to allow for additional tax-free compounding.
6. Invest in yourself
Think about taking classes or other steps to enhance your skills and professional opportunities. It may help to advance your career, and maybe a source of personal satisfaction.
7. Share your good fortune through philanthropy
Charitable contributions of cash up to $300 ($600 married filing jointly) can be deducted “above the line” for those who don’t itemize in 2021. For greater amounts, consider bunching deductions and reducing future capital gains taxes by giving appreciated property via a donor-advised fund instead.
Be grateful, and have some fun. With over 10 million unemployed in the US, take time to appreciate your good fortune. In addition to the financial strategies mentioned above, you might also consider splurging on a vacation, new car, home renovation, or other items that bring some personal satisfaction.