08 Dec I’m getting a $10K bonus. What should I do with it?

Q. Happy holidays! I just found out I’m getting a $10,000 bonus from my job. Totally unexpected! I have to decide what to do with the money. I have no debt, I have an emergency fund and I fully fund my 401(k). I’m single with no kids. Any ideas?
— Lucky

A. Congratulations on the bonus!

That’s great news.

There are a few ways you can plan for the money.

First, you should make sure you set aside cash you may need for any federal and state income taxes due when you file your returns in 2022 if you think you may have a liability, said Marnie Hards, a certified financial planner with Aznar Financial Advisors in Morris Plains.

Then given that you have an emergency fund, no debt and fully fund your 401(k) plan, she recommends you consider setting up and funding a Roth IRA each year if your income level allows, she said.

“Since you are single, the phase-out limits for your modified adjusted gross income (MAGI) is $125,000 to $140,000 in 2021,” she said. “This means that if your MAGI is less than $125,000, you can put the full annual contribution amount of $6,000 into a Roth IRA.”

If you are 50 or over, you can make an additional catch-up contribution of $1,000, she said.

If your income is in the phase-out range, you will be able to contribute a lesser amount. If your MAGI exceeds $140,000, this is not an option for you, she said.
MAGI is generally the taxpayer’s adjusted gross income calculated without certain deductions and exclusions.

“Unlike a traditional IRA, there are no required minimum distributions from a Roth IRA — under current tax law,” she said. “There are also no taxes due on future distributions from a Roth IRA, so whatever money you invest in a Roth IRA will be permanently tax-free to you upon distribution if you have reached age 59 ½ and met the five-year holding period requirement.”

You do have until the tax filing deadline to fund the Roth IRA, typically, April 15th of the following year, so you can fund a Roth IRA for 2021 up until April 15, 2022, she said.

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This story was originally published on Dec. 8, 2021.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.