March isn’t just another month for many employees – it’s the season of financial opportunity. With the arrival of annual bonuses and quarterly RSU distributions, you should consider how to make the most of these windfalls. Here’s how you can plant the seeds for financial growth:
Strategies for Your Bonus ~
- Debt repayment – Tackle high-interest debts like credit cards or loans head-on. Every payment made is a step towards financial freedom and saves you from future interest payments.
- Boost Retirement Contributions – Supercharge your retirement savings by maximizing contributions to your retirement plans. Even modest additions now can blossom into substantial nest egg growth over time.
- Fortify Your Emergency Fund – Strengthen your financial safety net by building or replenishing your emergency fund. The old rule of thumb still applies – it’s great to have a minimum of 3 months up to 6 months (or more!) of living expenses.
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- A 3-month emergency fund may be adequate if there are two earners in the household and both people have fairly secure jobs (government, university, etc.). A larger emergency fund (6 mos. – 1 yr.) can be recommended for those with only one earner in the household, especially if there are young children to provide for, or someone who is single. People employed in some industries that undergo frequent changes, like technology, may want to have a larger emergency fund.
Navigating Your RSU Distribution ~
- Be aware of taxation: When you receive your RSU distribution your company will withhold taxes. *Note – The IRS minimum required tax withholding rate is only 22%. Many people are in higher tax brackets and will owe additional taxes when they file. Make sure you are aware of your tax rate, and you ensure the appropriate amount of tax is either withheld by your employer or YOU stash some of the distribution aside to pay the additional tax liability.
- Strategic Stock Holding: If you are bullish on your company’s prospects, holding onto RSUs for long term growth can be lucrative. If you hold the stock for one year + one day from distribution date and then sell, you will pay long term capital gains tax on the growth from the stock price on distribution date to your future sales date.
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- Be aware of the amount of company stock you own as a percentage of your overall portfolio. We often see clients who never sell or don’t know when to sell and the stock can become a significant portion of their portfolio. You want to be sure your portfolio is diversified and not reliant on any one stock. A good rule of thumb is to have any individual stock position no more than 10% of your overall portfolio.
- Consider selling: While it’s tempting to hold onto RSUs, consider selling upon distribution to address other financial goals or needs. Even though you may owe additional taxes, you can sell the stock at distribution and a portion (if not all) of the tax liability may be paid. You can use the cash from the RSU distribution sale for your financial goals such as:
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- Pay off or chip away at high-interest debts like credit cards or loans.
- Increasing retirement plan contributions – maximizing your pretax retirement contributions will help with your overall tax liability
- Emergency Fund – as mentioned above you can use the cash to build your emergency reserves.
- Funding goals – a new car, upcoming travel, child related costs, remodeling, etc. can all be funded with the cash generated from selling the RSUs at distribution
By channeling your bonus or RSU distribution towards these tactical and strategic goals, you are sowing the seeds for a more resilient and prosperous financial future.