Securing a raise or getting a promotion can bring a significant shift in your financial situation. It is a golden opportunity to redefine your financial goals and enhance the effectiveness of your budgeting. As this article discusses, it's crucial to understand how to strategically manage this increased income to pay off debts quicker, boost your savings, and ensure you're optimally benefiting from workplace-provided plans.
Budgeting Considerations
If your income has changed substantially, take some time to consider whether this impacts your ability to reach your current goals or if it results in new goals. For example, you may want to pay down your debts faster, increase charitable giving, or retire sooner. You can improve your contribution to tax-advantaged accounts such as 401(k)s, IRAs, or HSAs. At a minimum, a new budget may be needed.
Retirement Plans & Equity Compensation
If this change includes significant changes in the amount of employer-provided benefits (such as stock options, RSUs, or supplemental retirement plans), think about your strategy for equity compensation, including planning for vesting, exercise, and tax consequences. Consider how any stock-based compensation could make your financial plan overly reliant on one company.
Is your raise or promotion is making new benefits available for you to participate in, such as non-qualified deferred compensation plans? If so, read the plan documents to understand your options and the potential benefits of participating. If your promotion includes equity ownership, think about how the buy-in process is handled and the amount/timing of the payments you will need to make; understand the options to pay for the equity, including self-financing, bank financing, or company-provided options.
If you have a retirement plan with your employer, review the amount you are able to contribute. If you contribute the maximum salary deferral, consider whether a Mega Backdoor Roth contribution is available. If you or your spouse has been contributing to a traditional IRA, confirm whether you are eligible to deduct your contributions (in whole, in part, or not at all).
If you received nonqualified stock options or restricted stock, consider the benefits and trade-offs of an IRC 83(b) election (if permitted), allowing you to pay ordinary income tax on the nonqualified stock options or restricted stock now rather than when they vest.
Tax Planning Issues
Some tax planning considerations with a promotion or raise include seeing if you will be in a higher tax bracket, as you might need to adjust your tax withholdings and/or make quarterly estimated tax payments. It may also impact your eligibility for certain deductions or credits. Seek help on the amount of withholding you should elect – this may include electing the part-year withholding method to adjust your withholding.
Insurance Planning
An increase in income can impact your life insurance needs, so consider reviewing your coverages, which both individuals and employers provide. Along the same lines, consider reviewing your disability insurance policies. Depending on your income and employer benefits, a private disability policy may be needed if you don’t have a policy currently. If you have an individual disability insurance policy, consider updating it to reflect your new income.
Credit Update
If your income is now meaningfully higher, think about calling your credit card companies to inform them about your increased income. They may increase your credit limit, which could help your credit utilization ratio.
Conclusion
Embracing new financial opportunities with a raise or promotion can enhance your financial stability and goal achievement. However, it demands meticulous planning across various pillars - budgeting, retirement plan strategies, tax planning, insurance adjustments, and improving credit standing, all of which are crucial in optimizing your income increase and ultimately leading you toward a financially secure future.
WHWM is here to guide you in identifying your priorities, developing a plan, and making adjustments along the way. By choosing WHWM, you're partnering with our Founder and President, Stephen Bodwell. As a CPA and CFP® professional, Stephen is committed to helping you achieve your financial goals and aspirations. Don't hesitate to take the next step toward realizing your dreams. Schedule your complimentary, no-obligation 30-minute consultation with Stephen.
Walnut Hill Wealth Management, LLC (“WHWM”) is a registered investment advisor offering advisory services in the State of Texas and in other jurisdictions where exempt. The information provided is as of the date indicated and is subject to change.
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