Every November, you’ll become eligible for your AbbVie bonus, whether you’re a part of the CPS, AIP or SIP. Regardless of the amount, come March, you’ll need to know what to do with the money. Even if you end up spending it all, being intentional with your money is part of the process of having a financial plan in place.
What are the options of spending this bonus?
#1: The AbbVie Savings Plan
If you are not deferring any money from your salary to your 401(k), you can defer your bonus into the plan. This is especially helpful if you need all your salaried income to pay for monthly expenses, but your bonus would be considered a surplus amount. Check if you have maxed out the plan already, and if not, let payroll know that you want some (or all) of your bonus to go into your 401(k).
#2: Traditional IRA
If you want to save even more, you can contribute to a traditional IRA for your spouse (spousal IRA). Contributing to a 401(k) comes with stringent limits if you want to contribute tax-deferred amounts to your own IRA. For the spousal IRA, you can make contributions up until the tax filing deadline of the current year, and it can count towards your contributions for the prior year. If the contribution would not be deductible, then it does not usually make sense putting the money into a Traditional IRA for the long term.
#3: Roth IRA
Consider a Roth IRA if a Traditional IRA does not work for you. It is not tax-deductible, but all the contributions grow tax-free and all withdrawals in retirement are tax-free as well. If your income is too high for making direct contributions to a Roth IRA, then you can look at a “back door” contribution by making a nondeductible contribution to a traditional IRA, then converting it to a Roth IRA soon after.
You would make a nondeductible contribution to a traditional IRA, then convert it to a Roth IRA soon after. The value of the IRA when converted would be included in taxable income that year. If the IRA is held in cash and doesn’t earn anything before being converted, the subsequent conversion would be tax-free. If you have another IRA with tax-deferred contributions, this strategy becomes messy so ensure you know what consequences you’re running into before tackling this strategy.
#4: Health Savings Account (HSA)
If you are using the High Deductible Health Care Plan (HDHP) at your workplace, then contributing to your HSA with your bonus can be very useful. An HSA offers all the immediate tax savings of a traditional IRA with the added long-term tax savings of a Roth IRA. You may put pre-tax money into an HSA and use it towards medical costs whenever you want, not just during the plan year.
HSAs are the trifecta of savings accounts: (contributions are made pre-tax, investments grow tax-deferred, and you don’t pay tax on withdrawals for qualified medical expenses) and since health costs are expected to go up as we go into retirement and age, building this balance will be helpful.
Another important benefit is that after the age of 65, an HSA account can be used for non-medical costs. It essentially becomes another tax-deferred account in your name.
#5: Reducing Debt
Consider paying down any high-interest debt, such as credit cards, as a priority. While it may not be a fun way to spend the money, it’s an important part of building a solid financial foundation.
Look at this way: If you have $10,000 in credit card debt that is subject to 20% interest, this can be a way of guaranteeing a 20% return on your money by paying it off versus leaving the balance to accumulate.
If you have various amounts of debt, make a “debt snowball” and attack the snowball with your bonus amount.
#6: Emergency Savings
No or little debt? Awesome. But how much savings do you have?
The rule of thumb is to have 3 to 6 months of expenses in savings. For those who have high commission income or are a single-income household, this goes up to 6-12 months.
If this is not complete, then use your bonus to complete funding it.
The up side: You only need to do this once, you’ll be surprised at how your money stress goes away with a full savings account, and if you do lose a job, you have a cash cushion to fall back until you find the next job.
#7: Investment Account
If you’ve got the debt and emergency savings taken care of, retirement savings are on track and there are no major goals, it’s all about investing for the future. An taxable investment account, invested in low cost, index funds will go along way to helping you obtain those long-term financial goals.
#8 Treating Yourself
Finally, it's time to treat yourself with some of that year-end bonus. This may be the best part of receiving the bonus! It is recommended that 10% of lump sum funds and be used for something fun. For example, if your bonus is $5,000, then you can take $500 to do something enjoyable. If you have a bonus of $100,000, then $10,000 can be used for an extravagant experience for you and/or your family.
Although it may be difficult for some people to "blow" their money, remember that saving $90,000 or $100,000 will not make much of a difference in the long run.
While this bonus will come along at the same time every year you’re employed and eligible at AbbVie, the amount will vary. If you can, try to live as though it is not part of your annual budget and will be a surplus amount of money that you can use each year. That will allow you to boost your savings each year or use it for memorable experiences. Whatever you end up using the money for from your AbbVie bonus – be intentional!