Morgan Stanley
Wealth Management

5 Strategies to Use a Bonus or Raise

Aug 1, 2024

Have extra money coming in? Here are five ways additional income can help you achieve your financial goals.

Key Takeaways

  • Using your bonus on long-term, big picture goals may lead to greater happiness in the long-run.
  • Consider contributing to your company’s 401(k) or other employer-provided retirement plan and take full advantage of any available company match.
  • If one of your long-term goals is to send your children to college, consider allocating some of your new funds towards a 529 education savings plan.

Many companies provide some form of incentive compensation as part of their overall compensation package. For 2024, 71% of senior finance leaders say they plan to give raises of at least 4%, according to a survey of Chief Financial Officers by Gartner, a research and consulting service.1 Some companies may also offer spot bonuses and raises during the year to recognize good work and motivate employees to continue to drive results.

 

If you’re fortunate enough to see a boost in your paycheck—whether it’s through a bonus, raise or promotion—it may be very tempting to spend this extra cash on new tech or fun vacation, but using your bonus on long-term, big picture goals may lead to greater happiness in the long-run.

 

What should you do with your extra compensation? Start with the basics. Focus on two important objectives: catching up and getting ahead. Here are five strategies to put your money to work for you now, so you can potentially reap the rewards down the road.

Focus on two important objectives: catching up and getting ahead.
  1. 1
    Pay down part or all outstanding debt

    If you have debt, such as student loans, car loans or credit card debt, a bonus can be a great way to tackle it aggressively. And if the interest rate on your debt is high, make this a top priority. The money you pay in interest can cost you thousands over time.

  2. 2
    Increase retirement savings

    It’s a good thing to contribute to your company’s 401(k) or other employer-provided retirement plan and take full advantage of any available company match. When you receive a bonus or an increase to your salary, consider increasing your contribution. Most money experts agree the more money you set aside today, the better prepared you’ll be in the long run, helped by the power of tax-deferred growth potential.

     

    Also consider maxing out other retirement plans, such as a Traditional Individual Retirement Account (IRA) or a Roth IRA. There are a few key differences between the two that you should understand before setting one up or making contributions:

     

    • Income Limits: With a Roth IRA, there is an income cap (only married couples filing jointly with Modified Adjusted Gross Income (MAGI) of less than $230,000, or a single person with MAGI of less than $146,000) are eligible to make a full contribution.2 The maximum annual contribution for both accounts in 2024 is $7,000 (or $8,00 for those who are age 50 or older).3,4
    • Taxes: Funds within an IRA have the potential to grow on a tax-deferred basis. Contributions to a Roth IRA are made with after-tax money, so you can withdraw the contributions tax-free, penalty-free any time (subject to certain rules). The earnings can be withdrawn federally tax-free, penalty-free once you reach age 59 1/2 or meet one of the other specified distribution events and have met the five-year requirement.5, 6

     

    Roth IRAs may be particularly well-suited to millennials and those starting their careers because of the ability to withdraw contributions without tax or penalty if necessary. You should discuss with your legal and tax advisor when considering your options.

  3. 3
    Contribute to a savings or investment plan

    If your current financial situation is solid and your debt is under control, consider investing your newfound cash in a savings or investment plan that is earmarked for a long-term goal, like buying a home, but is also available for any short-term emergencies. Resist the temptation to invest in an ad hoc manner. Instead of picking a few hot stocks, follow your long-term investment strategy. Work with your Financial Advisor to help reduce volatility within your portfolio through diversification and asset allocation tactics. 

  4. 4
    Increase Education Savings

    For a full time student, the average annual cost of a private nonprofit four-year college for tuition and fees was $41,540 for the 2022-2023 school year, according to the College Board.7 These expenses could rise every year, making saving for your children’s college education a priority.

     

    If one of your long-term goals is to send your children to college, consider allocating some of your new funds towards a savings plan dedicated to covering these expenses. A 529 Education Savings Plan account can be an excellent college savings vehicle because earnings grow tax-free and withdrawals are tax-free when used for qualified education expenses. 

  5. 5
    Invest in Yourself

    If all your necessities are covered and your long-term goals are on track, think about using some of your enhanced compensation to accomplish an important short-term goal. For instance, if you’re focused on making healthier choices, you may want to consider investing in a gym membership or a wellness group. And if you're striving to slow down your lifestyle, you may want to book a meditation retreat or learn yoga. This way, you reward yourself for a job well done, while achieving an important goal.

Making the Most of Your Money

Earning and receiving a bonus, raise or promotion is very satisfying, and can help you advance your financial well-being. Speak with your Financial Advisor about how the money can help you reach your future goals.

Find a Financial Advisor, Branch and Private Wealth Advisor near you. 

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1 The Society for Human Resources Management (SHRM), Salary Increase Projections 2024 (and 2023), https://www.shrm.org/topics-tools/tools/express-requests/salary-increase-projections-2024-2023

2 NerdWallet, Roth IRA Contribution and Income Limits 2024,July 11, 2024, by Arielle O’Shea and June Sham, https://www.nerdwallet.com/article/investing/roth-ira-contribution-limits

3 IRS, Retirement Topics - IRA Contribution Limits

4 The IRA catch‑up contribution limit for individuals aged 50 and over was amended under the SECURE 2.0 Act of 2022 (SECURE 2.0) to include an annual cost‑of‑living adjustment but remains $1,000 for 2024.

5 To be a federal income tax-free qualified distribution, the distribution must (a) occur after the 5 tax-year period beginning January 1 of the tax year in which the owner (or their spouse) makes their first Roth IRA contribution, and (b) be made on or after the owner reaches age 59 1/2, due to the owner’s death or qualifying disability, or for a qualified first-time homebuyer purchase ($10,000 lifetime maximum). The state income tax treatment may differ.

6 With a Traditional IRA, the contribution may be deductible or non-deductible.5 Deductible contributions and earnings are taxed when you withdraw them. Non-deductible contributions are not taxable but the earnings are. The taxable portion of withdrawals made prior to age 59 1/2 may be subject to an additional 10% federal tax unless an exception applies. 

An individual who is not an active participant in an employer plan (and whose spouse is not an active participant) can make fully deductible contributions up to the annual limit. The deduction is phased out for individuals who are (or who have spouses who are) active participants in an employer plan whose Modified Adjusted Gross Income (MAGI) exceeds certain amounts. An individual who is not eligible to make a deductible contribution to a traditional IRA may make a non-deductible contribution. You must file IRS Form 8606 in each year that you make a non-deductible contribution to a traditional IRA.  The portion of a traditional IRA distribution attributable to a non-deductible contribution will not be taxed.

7 The College Board, Trends in College Pricing and Student Aid in 2023, Nov. 2023, https://research.collegeboard.org/media/pdf/Trends%20Report%202023%20Updated.pdf  

Disclosures:

This material does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this material may not be appropriate for all investors. Morgan Stanley Smith Barney LLC recommends that investors independently evaluate particular investments and strategies,and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. This material is not an offer to buy or sell any security or to participate in any trading strategy.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

When Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors (collectively, “Morgan Stanley”) provide “investment advice” regarding a retirement or welfare benefit plan account, an individual retirement account or a Coverdell education savings account (“Retirement Account”), Morgan Stanley is a “fiduciary” as those terms are defined under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and/or the Internal Revenue Code of 1986 (the “Code”), as applicable. When Morgan Stanley provides investment education, takes orders on an unsolicited basis or otherwise does not provide “investment advice”, Morgan Stanley will not be considered a “fiduciary” under ERISA and/or the Code. For more information regarding Morgan Stanley’s role with respect to a Retirement Account, please visit www.morganstanley.com/disclosures/dol. Tax laws are complex and subject to change. Morgan Stanley does not provide tax or legal advice. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a Retirement Account, and (b) regarding any potential tax, ERISA and related consequences of any investments or other transactions made with respect to a Retirement Account.

The 529 Plan Program Disclosure contains more information on investment options, risk factors, fees and expenses, and potential tax consequences. Investors can obtain a 529 Plan Program Disclosure from their Financial Advisor and should read it carefully before investing.

Investments are subject to market risk and may fluctuate in value. Before investing, investors should consider whether tax or other benefits are only available for investments in the investor’s home-state 529 college savings plan.

© 2024 Morgan Stanley Smith Barney LLC, Member SIPC.

CRC#3721243 (08/2024)

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