5 Ways To Use Extra Compensation

Companies often provide some form of incentive compensation as part of their overall compensation package. For 2024, many employers are planning higher year-over-year salary increase budgets, with a median raise of 4% across all employee categories, according to the Annual National Salary Budget Survey from Salary.com, a compensation data and analytics firm.¹ Some companies may also offer spot bonuses and raises during the year to recognize good work and motivate employees to continue to drive results.

If you’re fortunate enough to see a boost in your paycheck—whether it’s through a bonus, raise, promotion or equity compensation payout—it may be tempting to spend this extra cash on new tech or a fun vacation, but using your bonus on long-term, big picture goals may lead to greater happiness in the long run.

What should you do with your extra compensation? Start with the basics. Focus on two important objectives: catching up and getting ahead. Here are five strategies to put your money to work for you now, so you can potentially reap the rewards down the road.

1. Pay Down Some or All Outstanding Debt

If you have debt, such as student loans, car loans or credit card debt, a bonus can be a great way to tackle it aggressively. And if the interest rate on your debt is high, make this a top priority. The money you pay in interest can cost you thousands over time.

2. Consider Boosting Your Investment in Your 401(k) and Maxing Out Other Retirement Accounts

It’s a good idea to contribute to your company’s 401(k) or other employer-provided retirement plan and take full advantage of any available company match. When you receive a bonus or an increase to your salary, consider increasing your contribution. Most money experts agree that the more money you set aside today, the better prepared you’ll be in the long run, helped by the power of tax-deferred growth potential.

Also consider maxing out other retirement plans, such as a Traditional Individual Retirement Account (IRA) or a Roth IRA. There are a few key differences between the two that you should understand before setting one up or making contributions:

• Income Limits: With a Roth IRA, there is an income cap. For 2025, only married couples filing jointly with Modified Adjusted Gross Income (MAGI) of less than $236,000, or a single person with MAGI of less than $150,000, are eligible to make a full contribution.² The maximum annual contribution for both accounts in 2025 is $7,000 (or $8,000 for those who are age 50 or older). This limit remains the same from 2024.³

 

• Taxes: Funds within an IRA have the potential to grow on a tax-deferred basis. Contributions to a Roth IRA are made with after-tax money, so you can withdraw the contributions tax-free, penalty-free any time (subject to certain rules). The earnings can be withdrawn federally tax-free, penalty-free once you reach age 59 1/2 or meet one of the other specified distribution events and have met the five-year requirement.⁴

 

With a Traditional IRA, the contribution may be deductible or non-deductible.⁵ Deductible contributions and earnings are taxed when you withdraw them. Non-deductible contributions are not taxable, but the earnings are. The taxable portion of withdrawals made prior to age 59 1/2 may be subject to an additional 10% federal tax unless an exception applies.

Roth IRAs may be particularly well-suited to those starting their careers because of the ability to withdraw contributions without tax or penalty if necessary. You should discuss with your legal and tax advisor when considering your options. 

3. Contribute to a Savings or Investment Plan

If your current financial situation is solid and your debt is under control, consider investing your newfound cash in a savings or investment plan that is earmarked for a long-term goal, like buying a home, but is also available for any short-term emergencies. Resist the temptation to invest in an ad hoc manner. Instead of picking a few hot stocks, follow your long-term investment strategy. Consider working with a Financial Advisor, who can help reduce volatility within your portfolio through diversification and asset allocation tactics. 

4. Increase Education Savings

If one of your long-term goals is to send your children to college, consider allocating some of your new funds toward a savings plan dedicated to covering these expenses. A 529 education savings plan can be an excellent college savings vehicle because earnings grow tax-free and withdrawals are tax-free when used for qualified education expenses.

5. Invest in Yourself

If all your necessities are covered and your long-term goals are on track, think about using some of your enhanced compensation to accomplish an important short-term goal. For instance, if you’re focused on making healthier choices, you may want to consider investing in a gym membership or a wellness group. And if you're striving to slow down your lifestyle, you may want to book a meditation retreat or learn yoga. This way, you reward yourself for a job well done, while achieving an important goal.

The Bottom Line

Earning and receiving a bonus, raise, promotion or equity compensation payout is very satisfying, and can help you advance your financial well-being. Consider speaking with a Financial Advisor about how to put that money to work to help you reach your future goals.

Footnotes:

¹ Salary.com, Will 2025 See Lower Salary Increases? Salary.com Releases Latest National Salary Budget Survey(opens in a new tab). November 2024.

² Investopedia, IRA Contribution Limits for 2024 and 2025(opens in a new tab). January 2025.

³ IRS, 401(k) limit increases to $23,500 for 2025, IRA limit remains $7,000(opens in a new tab). November 2024.

⁴ To be a federal income tax-free qualified distribution, the distribution must (a) occur after the 5 tax-year period beginning January 1 of the tax year in which the owner (or their spouse) makes their first Roth IRA contribution, and (b) be made on or after the owner reaches age 59 1/2, due to the owner’s death or qualifying disability, or for a qualified first-time homebuyer purchase ($10,000 lifetime maximum). The state income tax treatment may differ.

⁵ An individual who is not an active participant in an employer plan (and whose spouse is not an active participant) can make fully deductible contributions up to the annual limit. The deduction is phased out for individuals who are (or who have spouses who are) active participants in an employer plan whose Modified Adjusted Gross Income (MAGI) exceeds certain amounts. An individual who is not eligible to make a deductible contribution to a traditional IRA may make a non-deductible contribution. You must file IRS Form 8606 in each year that you make a non-deductible contribution to a traditional IRA.  The portion of a traditional IRA distribution attributable to a non-deductible contribution will not be taxed.