There's something satisfying about seeing a substantial bonus hit your bank account. After all, you've earned it. But before you start mentally spending that money, there's a question worth considering:
Would you be better off taking the cash now or deferring some of it until later?
For executive women in their peak earning years, this decision can affect far more than this year's tax bill. It can influence investment opportunities, retirement income, and even how much freedom you have to make your next career move.
Here are five considerations that deserve a closer look.
1. Think Beyond This Year's Tax Bracket
A substantial bonus can increase your tax bill, especially if part of it falls into a higher marginal tax bracket. If your employer offers a nonqualified deferred compensation plan, you may have the option to receive some of that income in a future year when your tax rate could be lower.
But here's the catch: Your income doesn't necessarily drop the moment you retire. Stock compensation, investment income, and other sources of earnings can make your future tax picture more complicated than you expect.
A smarter approach: Map out your anticipated income over the next decade. Include stock compensation, potential Roth conversions, consulting income, and retirement plans. You may discover that certain years offer better opportunities to receive deferred compensation than others.
2. Consider How Much of Your Wealth Already Depends on Your Employer
Your salary, bonuses, company stock, and retirement benefits may all be tied to the same organization. Deferring additional compensation increases that connection.
Unlike a 401(k), nonqualified deferred compensation generally remains subject to your employer's creditors. If the company experiences financial difficulties, that money could be at risk.
A smarter approach: Calculate how much of your financial future is already dependent on your employer. If you're heavily concentrated in company stock or other employer-related benefits, taking your bonus and investing it somewhere else may be worth the immediate tax cost.
3. Don't Overlook What That Money Could Do Today
Deferring taxes sounds appealing. But postponing income also means giving up access to money that could be working for you now.
A smarter approach: Compare the potential after-tax value of deferred compensation with the opportunities available if you invest the after-tax bonus today. The best tax decision isn't always the best wealth-building decision.
4. Watch Out for a Future Tax Pileup
Imagine deferring bonuses for several years, planning to receive the money when you retire at 60. Then retirement arrives, along with deferred compensation payments, investment income, consulting fees, and perhaps proceeds from selling company stock.
Suddenly, your supposedly lower-income retirement year isn't so low-income.
A smarter approach: Review how future deferred compensation payments will overlap with other income. If your plan allows installment payments, those may offer more flexibility than a lump sum. Keep in mind that deferred compensation elections are subject to strict IRS rules, so you generally can't change your payment schedule whenever it's convenient.
5. Plan for the Career You Might Have, Not Just the One You Expect
It's easy to assume you'll remain in your executive role until your planned retirement date. But what if you decide to consult, start a business, or leave corporate life five years earlier? What if a restructuring makes that decision for you?
Depending on your employer's plan, leaving your job could affect when your deferred compensation is paid.
A smarter approach: Evaluate your bonus decision under three scenarios: staying until retirement, leaving voluntarily, and experiencing an unexpected job loss. If a strategy only works when everything goes according to plan, it may not be the right strategy.
So, Should You Take the Cash or Defer It?
The answer doesn't have to be all or nothing. Some employer plans allow you to defer a portion of your eligible bonus while receiving the rest immediately. That could give you an opportunity to balance current investment needs with future tax planning.
Your bonus is a reward for your professional success; make sure it's also helping you build the financial future you want. At C. Beach Brown, we help professional women make thoughtful decisions about executive compensation, taxes, investments, and retirement. If you're weighing your bonus options, let's look at how they fit into your bigger financial picture.
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