Ask the grumpies: What to do with signing bonus?

A New Hire asks:

As part of my start-up package, I get a lump sum of ~$60k cash.  The default option is for this to be paid monthly over 5 years, but you can choose other schemes, including all at once.  However, if you leave before 5 years is up, you have to pay it back (I’m assuming pro-rated).  I’m not sure how taxes would be handled.  We assume we’d have to pay back money you already paid taxes on, but maybe it could be written off as a loss.

Considerations:

  • Our (combined income) – (tax sheltered retirement contributions) will be $186 – $228k the first year (bonus is a large component of my spouse’s compensation package).  The expected value (with an “average” bonus) is $206k
  • We only will move away if there are extenuating circumstances
  • We hope to buy a house in approximately 2 years, maybe slightly sooner.  We can probably accomplish this without the lump sum help, but obviously we’d borrow more
  • We expect the home to cost in the neighborhood of $700k, perhaps more
  • If taken as a lump sum, we’ll likely put into a CD until we use it for a home downpayment.
  • We have access to a special loan program requiring 10% down with no PMI, and no real considerations of “jumbo” vs regular mortgage.  The drawback is that while rates are quite attractive (3% today with no points), it is variable and pegged to short term investment returns with a floor at 3%

What is the most optimal way for us to take this money?

I’m advocating for lump sum ASAP or splitting between two years.  I think the 2 years split would be optimal.  Spouse is not sure what to do, but thinks the 5 year monthly trickle makes sense.  I assume that if we choose a 2 year period, it may have to be monthly – but I can check if we can get 2 lump sum payments if determined that is most optimal.
(A separate analysis would ask if the mortgage program is a good deal, given that we could lock in low rates in the private market.  But we aren’t ready to buy yet, so we can’t compare that yet.)

1.  Find out how taxes are going to be handled!  If there’s any chance that you can get that 60K to count for taxes on a lower income year (moving from piddly grad student salary to full year salary) and pay lower marginal tax rates on the full amount, that would be ideal.  Similarly, if you’re moving from a low tax state to a high tax state, it would be nice to have half the year count for the low tax state.

Similarly, if you think your raises or bonuses will be going up over time or that tax rates will be going up over the next 5 years, that argues for front-loading.  If you think Obama is going to be replaced with a tea party member and tea party houses… then you probably make enough money as a family that they’d want to lower your tax rates and you might want to put that off.

The tax bracket you’re estimating is:

28% on taxable income over $148,850 to $226,850, plus… so you’d be paying 33% on anything you earn over 226,850.  So ~2000*.05 = $100 extra for the amount that gets into the 33% bracket instead the 28% bracket, if I did my math correctly.  I would probably not do anything fancy to save ~$100 at that income.

2.  Does your department have a history of kicking people out at the 3rd year review or only at tenure?  How likely are you to stick out a bad situation if there are “extenuating circumstances” (does the spouse’s job keep you in this area?  would you be willing to move to say, Kansas, if this job doesn’t work out?).  More importantly, if “extenuating circumstances” happen, are you easily going to be able to pay back the money from your spouse’s salary or from savings?  Does the university really make people pay it back in practice?  Does the university allow payment plans to be set up if they do?  Of course, if you keep it in a CD you should be able to pay it back with only minimal penalty if you have to break the CD.

3.  Is it really 50K all at once vs. 1/5 of that a year for 5 years?  Even with small inflationary expectations, there’s no good reason except for #1 and #2 that I can think of to let them earn interest on the money rather than you.  Even at a piddly 1% interest rate.

So I guess in general my recommendation is to take the lump sum and keep it somewhere safe.  Unless you feel more confident about #2 or are planning on doing a lot of additional saving so you can easily pay back 20 or 30K at the drop of a hat.  (Something you may want to be able to do before you buy a house, just in case!)

Re: the mortgage issue, ask us again when you’re closer to that decision and know what the rates are!  It does sound a bit sketchy and there may be additional strings depending on the school you’re at.  (The UCs, for example, use their mortgage program as a way to lock professors in, I have heard.)

Standard disclaimer:  we are not professional financial planners or accountants.  Always talk with a real professional before making these kinds of important decisions.

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11 Responses to “Ask the grumpies: What to do with signing bonus?”

  1. Jenny Says:

    from the description above I’d say you are going to be living in [area of the country]. $226,000 won’t be enough. especially if you are planning on having kids or have kids. You’ll have to watch every penny.

    $700000 is the worst upper limit to have on your house purchase because all you’ll find are old houses needing a lot of work. Our real estate agent said that and I couldn’t believe my ears at first.. But it is true. Spend at least 1 million to get a house that won’t be a full-time job or buy the cheapest house you can find (>400000) and plan on remodeling. If you spend $700000 and then have to fix up it will be harder.

    If you aren’t living in the above area then disregard everything I said.

  2. First Gen American Says:

    I’d probably take it up front too as long as there are no penalties in doing so. I’d also put it towards conservative savings up until I was ready to purchase my house. You have a short term goal in buying a home, so having a house mortgage fund where you put your bonus’s (both yours and spouses), tax returns, etc plus whatever extra you can afford and can budget for is ideal. I had a tougher time saving when I had everything lumped into one account.

    Some people are probably looking at that house price and flipping, but most high paying jobs are in high cost of living areas.

    • Linda Says:

      Yep, I saw that house price and flipped! Actually, I found it rather depressing because I realized that a) I make really good money for an area with housing that is comparatively a bargain; b) if I ever do move out of this area (which I fervently hope to do, and most definitely feel like I MUST do in the winter) I will not be able to sustain such a comfortable lifestyle since my housing costs will be outrageous. :-(

  3. Debbie M Says:

    I would agree that it would be best to take it up front, but don’t use any more of it to help with the house down payment than the amount you wouldn’t have to pay back at that point, just to be safe. You would have to find out if the pay-back amount is really pro-rated first.

    The only reason I see to spread it out, besides tax reasons, is if you don’t trust yourselves to not spend any of the part that’s not really yours yet when it’s sitting there so beautifully accessible. Or if you think you might be tempted blow it all on something you’d regret later–which I almost didn’t even think of because you’re a reader of these Grumpy Rumblings, but which actually is a problem for many, many people.

    • nicoleandmaggie Says:

      For the being tempted to blow it thing, locking it into a CD helps.

      • Debbie M Says:

        It doesn’t help me, ever since I learned that in most cases the “substantial penalty for early withdrawal” is actually just part or all of the accrued interest, which these days is basically nothing.

        I-bonds helps me the first year (because it’s physically impossible to cash them the first year).

        An old roommate used to put savings in an inconvenient bank (that was not tied to her convenient bank). She also liked to have paper savings bonds that she could fan out in her hand to make her feel rich–she really didn’t like cashing those in.

  4. anonsmart Says:

    Don’t take it monthly. 5 years or even 1or 2 yrs is definitely enough time for spouse to get used to the additional monthly amount and get used to calcing it in base salary. It’d feel like a salary cut when it ends – bad for morale, feeling appreciated at work. There’s a natural end of the honeymoon period then anyway, don’t pair that with a salary cut. My two cents based on ~7 years working in compensation.

  5. plantingourpennies Says:

    I’d take it all up front in one lump sum as long as the tax implications are as small as the grumpies calculated. Also – if there is a move to a higher tax state involved with the payout, is it possible to get the bonus paid out while working remotely in a lower-tax state? When bonuses on this scale were dispersed at my last job in the midst of some relocations to NYC and SF from Florida, those that chose to relocate prior to bonuses being paid out paid an additional ~10% on the income that they wouldn’t have had to if they had gotten the payout prior to the move. (So NY/C and Cali got an extra ~$6K from those folks because they moved a month too early.) Those of us that stayed in FL didn’t have to worry about this.

    It might not be a possibility, as it might require “working remotely” for a pay period prior to bonus payout, but you never know til you ask, right?


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