Five ways to make to best use of your workplace bonus

If you’re fortunate enough to get a year-end bonus from your employer, you may already be daydreaming about that big vacation you’ll spend it on. Before spending that extra money in one fell swoop, consider how that lump sum could benefit you over the long term. Indeed, paying down debt or putting the proceeds into an investment account could put you in a better financial position in the future. Use a tax-efficient account, such as a Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA), and you might even turn that one trip into many come retirement time.

Before deciding how to spend or invest the bonus, you should understand how much of that money will actually end up in your account. The gross amount of your bonus and the net amount could differ significantly. That’s because a bonus is often taxed in the same way as your salary. Your employer might also deduct Canada Pension Plan (CPP) contributions and employment insurance (EI) premiums from your bonus before you receive it – unless you’ve already reached your maximum contributions for the year.

What you do end up with could be used in a variety of ways. Here are some options.

1. Contribute to your RRSP.

One way to maximize your bonus is to put the gross amount directly into an RRSP. Some workplaces will help you do this. Otherwise, you can put whatever you receive into your RRSP yourself. In both cases, the contribution to your RRSP will reduce your taxable income, potentially resulting in a refund of any taxes already paid. If you put that money into an RRSP within the first 60 days of the year, you’ll have the option to reduce your taxable income in the current tax year, or you can save it and report it next year.

You should also consult your financial advisor – or check your latest notice of assessment – to ensure you don’t exceed your annual RRSP contribution limit.

Here are some other tips to make the most of your RRSP account.

2. Take advantage of tax-efficient investment options.

In addition to contributing to your RRSP, another tax-efficient choice is putting the money into your TFSA, if you still have contribution room available. While TFSA contributions aren’t tax-deductible, you can withdraw money at any time, tax-free. That’s unlike RRSPs, where contributions are tax-deductible, but withdrawals (typically in retirement) are taxed.

If you’re planning to buy a home in the years ahead, you might also consider putting the bonus proceeds into a First Home Savings Account (FHSA). The FHSA gives qualified individuals up to $40,000 in tax-free savings room (or $80,000 for couples) to purchase their first home, with a maximum contribution limit of $8,000 per year.

Parents may also consider contributing to a Registered Education Savings Plan (RESP). The RESP is not only a great way to save for a child’s post-secondary schooling, it also offers tax benefits and government grant programs to help grow the savings.

If you’ve maxed out your contribution room on RRSPs or TFSAs, another good option for your bonus is adding it to your non-registered investment portfolios – investment accounts that don’t come with any tax advantages – to help build long-term wealth. While you may have to pay the Canada Revenue Agency for any gains made on the sale of a stock, or any dividends or income generated by your portfolio, this is still a good option for those who have maximized their registered-account contributions for the year.

In all of these accounts, including the RRSP, you invest your money in a variety of securities such as stocks, bonds, mutual funds or exchange-traded funds (ETFs). The earlier you start investing, the more you can potentially benefit from the power of compound growth.

If it’s your first time investing in the stock market, here’s a beginner’s guide that can help.

3. Pay off high-interest debt.

Consider using your bonus to pay off high-interest debt such as credit cards, which often come with 20% interest rates. If you have a variety of debts, like multiple credit cards or personal loans, consider consolidating those loans into one single payment plan and then paying a chunk off with your extra funds. Not only will these strategies help reduce your interest costs, but paying down debt can improve your credit score, making it easier to borrow money – and at lower interest rates – in the future. A good credit score is also important when purchasing a car or getting a mortgage. Paying off loans and reducing debt can also free up cash to reach other financial goals.

4. Build your emergency fund.

Another smart use of bonus money is to set all or some aside for emergencies, such as a costly car repair, a leaky roof or other unexpected expenses, including a potential job loss. The general recommendation is to set aside three to six months of living expenses for emergencies, particularly for a loss of employment income.

Some people save money year-round, which is a great idea, but topping up the fund with bonus money can also give you more of a financial cushion – and peace of mind.

5. Invest in career development.

Investing in your career is another wise way to deploy bonus dollars. The funds can be used for professional courses or certifications to enhance your career. Not only will this increase your skill set, it could also boost your earning potential. Some education expenses also qualify for tax credits. You can find more information here.

What is the right solution for your bonus?

If you’re expecting a bonus from your employer, consider speaking to your financial advisor about how you can make the most of your bonus before you receive it. Consider which approach best suits your financial situation and your money goals – you could also mix and match, paying down some debt, investing some and putting the rest away for a vacation.