Not only did you land your first full-time job, but you also scored a bonus in cold, hard cash. Now, what to do with it? Here are five ideas and a reminder about giving Uncle Sam his share.
MNE’s content is intended for educational purposes only. Investing carries risk, including the loss of value. Do not construe any of our content as tax, legal, or investing advice. Talk to a trusted, certified professional. And take your vitamins.
Why do companies award signing bonuses?
Before answering the question, “Why fam?” we need to start with “Homie, what?” Bonuses in corporate America have been around since the late 1800s and fall into the category of supplemental pay. In the IRS’s mind, bonuses are in the same family as overtime pay, severances, and tips.
You may think, “Why is my company shelling out cash upfront before seeing a lick of work?” The long answer includes a historical versus current labor market shortage analysis. But I’m not here to put you to sleep faster than a melatonin overdose by mulling over metrics like JOLTS. The short answer is that boomers finally see our generation as “no cap.”
Before this ego stroke in the form of a bonus wears off, let’s answer your burning questions: How are sign-on bonuses taxed, and should I save, invest mine, or yeet the check on sports betting and NFTs?
How are signing bonuses taxed?
Before we spend, let’s understand how this bad boy will get taxed. There are a couple of different ways to withhold taxes from a bonus. Since most signing bonuses come in a separate check, they’re subject to the flat-rate method. That’s where your new employer takes the recommended income tax withholding rate from the IRS — 22 % — and calls it a day.
If your signing bonus is combined with your first paycheck, it’ll be taxed aggregately at the withholding rate that applies to your regular earnings, which sometimes causes larger-than-expected withholdings. It all comes out in the wash, aka tax filing. It’s a common misconception that bonuses are taxed at higher rates than salary income.
5 smart things to do with your signing bonus
Let’s get to the fun stuff: using your bonus to save, spend, or diversify your net worth. These ideas are ordered from most conservative to most aggressive (emulating that “crypto braveheart” Mark Wahlberg wants you to be).
Pay off the bad debts
If short-term personal loans or credit card debt is plaguing you worse than an unmentionable virus, consider using your sign-on bonus to pay it off. You’re just starting your career, and big things are on the horizon for you. One day you’ll want to own real estate, or you may be eyeing the Cybertruck that supposedly goes into production next year.
But big purchases require good credit, and you achieve that by keeping debt under control. If your sign-on bonus isn’t enough to pay off your short-term debts, a lump sum payment is an excellent move toward financial freedom.
Stash into smarter emergency savings
This one is the most obvious, but I have a twist to spark your curiosity. The first item on any financially responsible adult’s to-do list is emergency savings. If you don’t have any, consider putting 3 to 6 months’ worth of your income in a savings account.
If you want to lock in an even higher yield and can withstand your emergency savings by taking a 12-month vacation, check out I-Bonds. At the time of this article, you can stash away up to $10,000 and earn 7.12% interest. Did I mention that sweet return is backed by the US Treasury? You won’t find that kind of risk-free return anywhere.
Open a Roth IRA
If you haven’t heard about Roth IRAs yet, here’s your quick 101. Since the sign-on bonus you pocket will have already been taxed, skip investing it in a traditional brokerage account and hop on over to a tax-advantaged account. If your modified adjusted gross income is less than $129,000, you can put up to $6,000 into a Roth IRA in 2022. That money will grow tax-free until you withdraw it.
If you want what’s best for your investment, you won’t want to tap this account until you’re 59 ½. At that point, you can withdraw your contributions and earnings without taxes or penalties. Suppose you need the money earlier; penalty-free withdrawals are allowed for first-time home purchases, childbirth expenses, and excessive unreimbursed medical expenses. And you can always withdraw Roth contributions — and not earnings — before retirement age.
Invest in yourself
Why stop learning because you’re out of college? Further your potential in investment banking, take up coding, or learn a second language. Hell, self-investment doesn’t have to be career-oriented. What’s that guilty pleasure (besides scrolling TikTok) that you suppressed during college that you want to pursue? Competitive duck-herding? Go for it.
You’re young: Take risks and make mistakes
Hot take: I can’t think of a better time in our lives to be jumping into new frontiers. Time is finite, of course, but with your entire career ahead of you, make room for calculated risk. Everyone knows not to throw all of their eggs in one basket, but consider throwing a couple into alternative investments.
In this day and age, there are so many avenues to invest, and as the article title says, there are limitless possibilities here, people. Real estate is often the first step out of securities trading, but you don’t have to be vanilla.
- Real estate could mean using your $10,000 bonus to renovate a garage and put it on Airbnb.
- If tenants aren’t your thing, why not research potential avenues of investing in the metaverse?
- Heck, I saw an app the other day to invest in an antique car sitting in some dude’s garage!
I could go on and on about all the alternatives. The key idea here is to take extraordinary risks on investments on which you’ve done your due diligence. Determine your risk comfortability and skip shopping on Amazon with your bonus.
Savor this bonus, then negotiate for more
Remember, you didn’t get this far in life to be satisfied with just one sign-on bonus. Your company sees your potential, so take this career by the horns and perform so well that they can’t help but pay out more bonuses. More bonuses equal more opportunities for building wealth.