What to do with bonus

[itsbeenforever]

We've had a huge change (for us) in our money and I'm trying to figure out what do to.  Last year our gross went from about 170-240K.  This year we'll be at 240K, but will probably get about 100K in bonus money.  Unless I lose my job (only 1 year of seniority in K-12 so I could get laid off with budget cuts) we should be at 240K going forward.  It's the bonus that is so unusual.

No debt other than 15yr at 2.625 (refied last year).  Have 25K in EF.  Will max 401k and 457 this year at 19.5K each and plan to increase liquid EF to 50K.

We are new to this level of income and want to be responsible.  I assume paying off the house is silly given the rate?  There are no other retirement options, though, right?  We don't have access to an HSA.  Given this, would you simply open a post-tax investment account for the 100K and invest in a fund?  Is there a better idea?  We are in our late 40s and have two kids in HS (so college is on the horizon).

[laterbloomer]

I'm nowhere near your income but personally I would invest.

[gs11rmb]

I say open a taxable account.  Congratulations on the pay raises you both must have worked hard!

[jd2005]

If I were in your shoes I would invest a portion 15-20% into taxable brokerage account, and put the rest towards the house.

How much do you have left in your house?  Does the bonus take care of it?  

[itsbeenforever]

We have about 340K on the house...no where near payoff.

Thank you....this honestly feels very weird for us.  Two years ago things were VERY different.  I just don't want to screw it up.

[jd2005]

I have always heard that paying off the house, although mathematically perhaps not the "best" move vs. investing over 15/30 years, is the way to go as it removes a lot of risk from the equation and frees up a lot of your income to invest with.  I can't wait to be able to drop my monthly mortgage payment into a brokerage account --- $$$$.

[Lizard Queen]

Do you have college savings for your kids? My state allows up to $10000/year put into college savings account, which is deductible from your taxable income for state income taxes.

I wouldn't use it to pay down the mortgage unless it actually gets you close to paying it off.

[itsbeenforever]

No real college savings, so that may be the area to focus on.  DS16 has autism, but he's had some growth this year and now I'm thinking he'll be capable enough to attend the local CC.  Not sure about DS14 - I'm guessing a state school.  He has no idea yet what he wants to do.

[tcu2003]

Do you have Roth IRAs? I would do backdoor Roths for you and your spouse, and you can fund them for 2020 (if you haven't yet) as well.

I'd probably invest the rest, since your house is so far away from being paid off, or put part toward the house and the rest to investments.

Are you going to need to pay for college, or is that already taken care of?

ETA - ignore the college question, saw the answer above

[azucena]

I've recently approached the $200k joint income including bonus range myself. I'm maxing 401k for myself but not DH because our lopsided incomes make it weird. We put what we can in his Roth.

We refinanced our mortgage to 15 yr at 2.5%, and I've promised myself not to prepay it even though I'm risk averse and would love to have a paid off house. I'm 42 so 57 is early enough and only costs us $50k in interest. We can surpass that in investments.

We're working towards 100k in liquid savings. Should make it by end of 2021. Dh is chronically ill so higher than most savings is what makes us comfortable in case either of us would need unpaid leave of absence.

Kids are 8 and 12 and we are prioritizing retirement over college savings. Will cashflow some of college, take loans for the rest, and help pay them off after.

We split my 25kish bonus 4 ways - charity, savings, home improvement, and vacations. This is a good balance for us.

[Deleted]

I wouldn't vote for paying down the mortgage- it won't change the payment, just number of payments left.

Max out 529 contributions for your state. (in mine, I think you get a tax break for up to $9K but none after hat although you can contribute more.)

If you itemize and you give generously to charities, you could put 2 or 3 years' worth of donations into a Donor-Advised Fund (Fidelity has them) and get a nice deduction in 2021 for the whole amount but parcel it out over a period of years. (You tell them where to send the check, they do it, and it can be anonymous. It just has to be a 501(c)(3) organization- same requirement as for other charitable deductions.)

I'd keep the investing simple and go with ETFs- maybe a S&P 500 and a bond ETF such as BND. If you're uneasy that the market is over-valued right now, put in maybe 1/5 every month till it's fully invested.

[itsbeenforever]

No state 529 and we don't itemize.  

I'll research the back door Roth.

It sounds like plain ol' investment account is the best option.  I appreciate the other threads about investing....they are helpful to this novice!

[itsbeenforever]

Jan 18, 2021 13:23:26 GMT -5 gs11rmb said:

I say open a taxable account.  Congratulations on the pay raises you both must have worked hard!

We are very lucky.  I completed grad school and found a job immediately in K-12 right when they had negotiated raises.  DH's company did really well last year because of the pandemic.  We're one of those 2020 financial winners.  I feel a lot of guilt about it, especially since I'm around so many who are struggling. 

[bobosensei]

What are your usual expenses?  If you aren't big spenders anyway I don't see a need to pay off the house early because if either of you lose a job you may be able to handle it on one income.

In your situation I'd put the entire bonus in a taxable brokerage account.  If you really want to pay down the house just throw extra at it over time (but I wouldn't even do that since you can save/invest enough to pay it off if you had to).  When I lost my job last year I cashed out some of my brokerage to make sure I was okay, and it turns out I got a job making 30k more a year 3 weeks later.  So while I have decided to keep more than 5k in online savings as a lesson learned, I'm focusing on building my brokerage account back up and leaving my 280k mortgage newly refinanced at 2.875 alone.

Don't feel guilty about your success.  240k a year for a couple isn't rich depending on where you live, but you've obviously worked very hard and deserve some comforts.  I mean obviously give back to a food pantry or other nonprofits or your religious organization, but don't feel bad about being the part of the middle class that did well.  You didn't profit off the pandemic like the Georgia senators that used knowledge of the pandemic to sell stock that would plummet and buy things like Zoom and profited in the millions.  I mean I even lost my job for 4.5 months, but ended up back at my old company making 30k+ more a year.

And my way of giving back has been to tip very well and to donate more to food pantries and animal focused nonprofits.

[justme]

I wouldn't put it towards the house. It would change nothing (ie your mortgage payment would be the same) but tie up a hell of a lot of money in a house (which in some places I think is heading towards another bubble/about to be impacted by the fallout of the pandemic once people start getting evicted and foreclosed on). 

I'm of the though process of put extra mortgage stuff in a separate account and wait until it's enough to fully payoff. That way it's accessible to you if you need it, but you can still pay it off early if you want. 

So yeah, I vote for taxable unless you can do the backdoor Roth. Though even with that you'd need some in taxable lol.

And maybe take a chunk of it in a savings trip for a really cool bucketlist trip with the kiddos before they start flying to coop. 

[dondub]

Buy a rental property.

[phil5185]

I put my available capital to its "highest and best" use.  Eg, I avoid most income products such as savings accounts CDs etc. And I avoid tying up capital in houses, cars, Emergency Funds.  Instead, I put my available capital into growth products, eg, an index such as the SP500 Index Fund (average return 11%/yr).  I have found over the years that it is better to handle emergencies by selling stock or borrowing, as opposed to having a large account of 'dead money' sitting in a bank. The 11% longterm return on investments FAR out paces the possible losses of forced sales of stock.

Here is a longterm history of the SP500 Index. politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html#.YAZgFRZlCUl  Check a few 30-year time blocks, the average 30-year return is about 11%/yr. Most of us are given a 30-year block in our working life.  And then, in retirement, it keeps on growing.

We mortgage our houses (rentals) to the max - whenever equity builds up we refi, remove the equity, and invest the money in stocks. I always use 30 year loans to minimize the payments, thereby retaining capital for investing. When we buy a new car, I get a zero down payment and use a 60-month payoff - and I keep the loan for the full term. Example - If I pay cash for the $40k car, that takes $40k out of my 11%/yr SP500 fund, a missed opportunity of  adding $12,000 to my SP500 account. But if I take the loan (and leave my own $40k growing in my SP500 fund), the interest cost  is about $3000 - a $9000 profit.

In your case, you could refi for 30 years and invest the extra money. And cut back on the $25k EF, $5k or $10k will cover appliances and car repairs. And in the case of a major 'real' emergency - 6 months out of work, illness, etc, you shouldn't try to cover that with a 'dead money fund" instead a 'real' emergency needs drastic actions - cash out a 401k, sell a house, etc.

In general, it isn't important what kind of account you use to hold your money - eg, 401k, Roth, IRA, taxable account - they are all taxed, either before you buy (roth) or when you sell (401k).  The key parameter is WHAT you put into the account - eg, SP500 index, CDs, bonds, savings - an 11% investment doubles about every 6 years, a 2% savings account provides no growth but it gives you safe storage of your buying power.

[thyme4change]

Speaking as someone who has kids in high school and has zero-point-zero-zero desire to be a landlord, taxable brokerage account is my choice. Since I have a senior, I am actually leaving a chunk of my bonusnin savings, because it will only be a few months until we have to get my first one out the door. But the rest of it, invest in the S&P index.

[wanttofire]

I agree.  Do a backdoor Roth but be careful if you already have Traditional IRAs as that will make things complex tax wise.   And put the rest in an index fund.  VTSAX, VFIAX in Vanguard are good ones.    I know the temptation to pay off the house is there, personally I plan to pay off ours before we early retire, more so for peace of mind but know it is not the best decision when looking at the numbers.

[skubikky]

I agree with opening a taxable investment account.

Maybe consider making a donation to a favorite charity?
The amount of course up to you.

[gooddecisions]

After we were able to both max our retirement accounts and HSAs, we opened a self-managed brokerage account and add to it whenever we have extra. Each of our retirement accounts are over $1 million as well as the brokerage account. I don't completely follow the Phil plan, but if it weren't for his persistence in continously offering this advice, I never would have opened the accounts I did. Thanks Phil!

[countrygirl2]

Make sure you have paid in enough on taxes. And aren't bonuses taxable at 50%? Seems that is in the back of my mind somewhere.

Son got a good raise this year and a bonus also, nothing like that I'm sure. And when he moves to Seattle, yes high cost of living, is getting a 25% pay increase so should help with housing.

But you are doing good, happy to hear others doing well. If you continue earning like that year after year, I honestly would pay off the house.

[tallguy]

Jan 25, 2021 15:22:57 GMT -5 countrygirl2 said:

Make sure you have paid in enough on taxes. And aren't bonuses taxable at 50%? Seems that is in the back of my mind somewhere.

Son got a good raise this year and a bonus also, nothing like that I'm sure. And when he moves to Seattle, yes high cost of living, is getting a 25% pay increase so should help with housing.

But you are doing good, happy to hear others doing well. If you continue earning like that year after year, I honestly would pay off the house.

No.  You will pay taxes on your bonus just like other income, but there is no special tax rate for bonuses.  How withholding for taxes is done may be different than regular income, but if there is too much withheld it will be refunded when taxes are filed and processed.  If companies choose to use the percentage method for withholding on bonus checks they must use 22%.  

[souldoubt]

Depending on what state you live in and whether or not you've hit the SS, SDI or other wage limits bonuses can be taxed at over 40%.  If you live in CA you likely pay 22% for federal, 10.23% for state, 7.65% for FICA and 1.1% for SDI (1% previously).  The federal and state rates generally are a minimum employers must withhold unless you have something from the fed/states that says you're allowed to have less withheld.  Prior to the 2019 tax changes the federal rate was 25% so assuming you didn't hit any of the wage limits most people would net about 56%.   

[schildi]

Jan 18, 2021 13:34:50 GMT -5 jd2005 said:

I have always heard that paying off the house, although mathematically perhaps not the "best" move vs. investing over 15/30 years, is the way to go as it removes a lot of risk from the equation and frees up a lot of your income to invest with.  I can't wait to be able to drop my monthly mortgage payment into a brokerage account --- $$$$.

Paying off a house actually does the opposite - it adds MORE risk to the equation, in different ways.
One thing is that you would be less liquid in case of a job loss or other emergency. What's better: $25k and a paid for house, or $125k and a $1,500 monthly mortgage payment if disaster strikes? The second scenario is the safer bet, no doubt.
Another risk factor is if let's say a natural disaster strikes that is not covered by the homeowners insurance. Flood or earth quake or tornados or whatever comes to mind. If the house is paid for, you may be stuck. Somebody who owes 80% of the value can walk away. May not seem fair, but that's the way it is.

Now add the mathematical probability of coming out ahead investing, and one must wonder why people prepay mortgages, especially in our current super low interest environment.

The only semi plausible reason imo is people stating "piece of mind", even though it's really only in their minds.

[jd2005]

Feb 3, 2021 22:32:59 GMT -5 schildi said:

Jan 18, 2021 13:34:50 GMT -5 jd2005 said:

I have always heard that paying off the house, although mathematically perhaps not the "best" move vs. investing over 15/30 years, is the way to go as it removes a lot of risk from the equation and frees up a lot of your income to invest with.  I can't wait to be able to drop my monthly mortgage payment into a brokerage account --- $$$$.

Paying off a house actually does the opposite - it adds MORE risk to the equation, in different ways.
One thing is that you would be less liquid in case of a job loss or other emergency. What's better: $25k and a paid for house, or $125k and a $1,500 monthly mortgage payment if disaster strikes? The second scenario is the safer bet, no doubt.
Another risk factor is if let's say a natural disaster strikes that is not covered by the homeowners insurance. Flood or earth quake or tornados or whatever comes to mind. If the house is paid for, you may be stuck. Somebody who owes 80% of the value can walk away. May not seem fair, but that's the way it is.

Now add the mathematical probability of coming out ahead investing, and one must wonder why people prepay mortgages, especially in our current super low interest environment.

The only semi plausible reason imo is people stating "piece of mind", even though it's really only in their minds.

Respectfully disagree with you point that you would rather have $125k and a $1,500 payment than a paid for house and $25k.  I'm of the mind that I would rather have the former.  Without a mortgage payment you can build up your cash position quickly.  Totally get that this is a point for debate.

Regarding the natural disaster issue, all of those can be insured against...you just have to buy the insurance.  I live in an area were hurricanes come frequently, I have a special emergency fund to help me pay for that deductible.  If my house was destroyed by a hurricane, I would rather have the insurance cash free and clear, than have to worry about paying my mortgage while I rebuild my house (or move).  

Regarding the math - I agree with you.  It makes more mathematical sense...but for me...the risk of over investing (meaning, funding above and beyond my 15-20%) rather than paying off the mortgage is not worth it.