what to do with bonus?

[SueInBoston]

I have to make a decision today if I want to defer my my bonus?

In the past I've always done 50/50, 50% to 401k and 50% cash.

background:
my divorce just became final, I cleaned out my savings to buy him out of the marital home. home needs some updating and I have no emergency fund. So I'm thinking of taking full bonus in cash for emergency fund and home fixing up, but the thought of taxes is killing me. Bonus is around $17k but in past years after taxes, I only got about 55% so I'm thinking maybe $8500?

i'm 54 with about 500k in retirement fund.

Home has good equity and I can get a HELOC if i have to..

I won't be able to save for the next 12 months as I get myself settled after divorce and paying a few bills. It will be paycheck to paycheck for awhile.

So...should I take bonus in cash to give myself some cushion? defer the whole thing? do 50/50 as I always have done?

Oh...I also am responsible for 50% of college tuition of about $15k

[corn18]

What's your current marginal tax bracket? And by any chance, do they do any kind of match if you send it to your 401k?

[SueInBoston]

What's your current marginal tax bracket? And by any chance, do they do any kind of match if you send it to your 401k?

I'm real embarrassed to say that I don't know my tax bracket. Ex did all the financial stuff. I make about 100k, head of household, 2 kids. work match 100% for first 3% and 50% for 3-5%

[james.hendrickson]

Sue - welcome to the forums! We look forward to chatting with you.

[corn18]

I'm real embarrassed to say that I don't know my tax bracket. Ex did all the financial stuff. I make about 100k, head of household, 2 kids. work match 100% for first 3% and 50% for 3-5%

So you're probably in the 25% marginal tax bracket. Bonuses are normally taxed at 25% for federal regardless of your actual marginal rate, so that is a wash.

If you put the bonus in the 401k, you'll eventually pay tax when you withdraw, but likely at a lower marginal rate. So there is an argument for that. But you need an EF, and the bonus could fill that need nicely. I know the tax up front seems like a waste, but I think in your case, I would take the bonus and use it as your EF. Way too many unknowns in your future to not have an EF.

[creditcardfree]

Another thought if you continue with the 50/50 plan...Do you have the ability to build an EF in the next six months? If so I would stick with your past plan and do what you can to live on your other income.

It would be wise now that your divorce is final, to start understanding your income and expenses. In the case of college tuition, when is it due? It would be wise to save what you can monthly.

Welcome to the forums!

[Nutria]

So you're probably in the 25% marginal tax bracket. Bonuses are normally taxed at 25% for federal regardless of your actual marginal rate, so that is a wash.

While that method is legal, all the bonuses I've seen have been added to person's paycheck. That means the payroll software thinks that your annual income is high, thus taxing you at 39.6%.

The third method is to cut a separate payroll check which treats the bonus as a regular paycheck -- thus in her case calculating that her yearly income is $442k and still taxing her at 39.6%

If you put the bonus in the 401k, you'll eventually pay tax when you withdraw, but likely at a lower marginal rate. So there is an argument for that. But you need an EF, and the bonus could fill that need nicely. I know the tax up front seems like a waste, but I think in your case, I would take the bonus and use it as your EF. Way too many unknowns in your future to not have an EF.

Agreed.

[StormRichards]

Any idea how much your monthly expenses are, and how much you might need to spend on the house?

That will help determine how much you need for your EF

[SueInBoston]

Our finance was a mess before the divorce (one of the trigger for divorce) and I'm still trying to get a handle. He only moved out last month. I'm still paying for his cell, car insurance and toll. We're not hostile, just a lot of stuff to work through after 30 years of joint.

I do keep track of expenses in Quicken but need to do a better job at budgeting. I don't think I can save for EF in the next 6-12 months due to some misc annual bills. I can scurry about $400/month but they will have to go to the annual bills. timeshare, auto & home insurance, tuition.

[Jluke]

Does your company do a 401k match on your bonus? If so, put that much in to get the match and then take the rest in cash.




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[SueInBoston]

Does your company do a 401k match on your bonus? If so, put that much in to get the match and then take the rest in cash.




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Company match %, so whatever I put in, they will match up to 3% full and 50% from 3-5%.

[Nutria]

We're not hostile, just a lot of stuff to work through after 30 years of joint.

I do keep track of expenses in Quicken but need to do a better job at budgeting.

Well, tracking all of your expenses is the first step in making a budget you can stick to.

(One tip I thought of was to have DW put groceries on one charge and "everything else" on another charge when she goes to Walmart. It's a big help in applying outflows to the budget.)

I don't think I can save for EF in the next 6-12 months due to some misc annual bills.

Would you finance an emergency via CC?

I can scurry about $400/month but they will have to go to the annual bills. timeshare, auto & home insurance, tuition.

Perfectly understandable.

[SueInBoston]

I've been cutting on our expenses as well...grocery has gone down since ex moved out and one kid away at school. Reduced my cable/internet pkg, etc.

I plan on getting a HELOC for absolute emergencies and WILL NOT use CC for that purpose, that was our downfall. I do use CC for day to day expenses but I pay it off immediately and track it daily in Mint. Ex was using CC when he was unemployed to maintain lifestyle and that's what got us in a big hole.

In 30 years of marriage, I had dug us out 3x and I told him that I can't trust him again and I'm too old to start over.

Both kids are late teens and will be out of the home in a year or two, at which time I can either downsize or get a roommate to help with expenses.

[LivingAlmostLarge]

If you split the bonus 50/50 how much cash is that? What are your monthly expenses if you can scurry $400? You make around $9k/month. And taxes with 2 child exemptions, HH and possibly child tax credit? It might make sense to defer.

How much is the bonus?

[greenskeeper]

take all cash. you need it now. 401k is fine and doesn't need the bonus money right now.