Getting a Bonus? Why You May Want to Put It Into Your IRA Instead of Regular Savings

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If your company has the practice of giving out year-end bonuses, consider yourself fortunate, because a lot of people aren’t in that position. And getting a lump sum of cash outside of your regular paycheck could make it possible to pad your savings nicely.

Of course, there are different types of savings your bonus can fund. If you feel you could use more money in your savings account for protection in the event of unplanned bills, then that’s the right place for your bonus.

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But let’s imagine you’re all set as far as your emergency fund goes. If you don’t want to spend your bonus and would rather sock it away, you can still stick that money in a savings account and let it earn some interest. But here’s why you may want to keep that cash in an IRA instead.

Enjoy those tax benefits

If you put money into a savings account, you won’t enjoy any tax savings. Quite the contrary — any interest you earn on that money will count as income and be subject to taxes.

On the other hand, if you put your bonus into an IRA, it can serve as a nice tax break. That’s because traditional IRA contributions get to go in tax-free, so if you get a $5,000 bonus and put all of it into an IRA, the IRS won’t tax you on that $5,000 of income.

Plus, once you have money in your IRA, you can invest it and grow it into a larger sum. In a regular brokerage account, any gains you realize during the year are subject to taxes right away. But with an IRA, you don’t pay taxes on investment gains year after year. Rather, those taxes are deferred until the time comes to take withdrawals from your account. And so it’s worth putting your bonus into an IRA for the tax benefits alone.

Less temptation to spend your money

The fact you’re even thinking about saving your bonus versus spending it is fantastic. But if you put your bonus cash into a savings account, you might, at some point down the line, be tempted to use it for something fun. If you stick your money into an IRA, you might take the option to spend your bonus off the table, thereby keeping you on track as far as your goals go. That’s because IRA withdrawals taken before age 59½ are subject to costly penalties, giving you more incentive to leave your money alone and let it grow.

Of course, if your bonus is the result of hard work all year long, it’s not unreasonable to take a portion of it and use it for something fun — say, a new TV or a much-needed getaway. But if you’re able to save at least some of your bonus, it pays to look at putting that money into an IRA rather than a regular savings account. That way, you can work toward your long-term savings goals and avoid taxes at the same time.

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