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It's MIP Time and appears to be good news for Walmart and Sam's Club associates overall! By now, you likely know how much you'll be receiving. The next step is deciding how to best utilize this extra income.
From a financial planning perspective, this can be a bit tricky because the MIP is an irregular cash infusion that is variable and taxes on it are often underwithheld.
While there's no one-size-fits-all approach to spending a bonus, it is a good practice to reflect on how you want to spend it before it hits your checking account. Here are a few key considerations to keep in mind as you think through best use for your MIP payout.
1.) Keep April Tax Bill in Mind
This is sort of a bummer, but it is important to set aside cash to cover your April tax bill. There are two common reasons why Walmart Executives may face a higher tax liability during tax season:
Tax Underwithholding: Taxes on equity compensation and MIP are typically withheld at 22%, likely lower than your actual tax rate. For example, if you find yourself in the 32% marginal tax bracket and receive $200,000 in MIP and Equity Compensation, you're immediately in the hole for $20,000.
Taxable Investment Income: Income from investment accounts isn't withheld throughout the year. If you earned significant capital gains, dividends, or interest, you'll owe taxes on these in April. Positive market performance in 2023 means taxes may be higher than in 2022.
By now, you probably have most of the information required to estimate your April tax bill. Feel free to schedule some time on my calendar, and we can put together a quick tax projection to assist you in planning for April. We'll also check if you need to make quarterly payments in 2024.
2.) Pay Off High Interest Debt
A smart move with your cash is paying off high-interest debt, typically anything above 5%. This includes credit card debt, student loans and car notes. Mortgages, unless recently acquired, usually have lower rates and don't fall into this category.
3.) Replenish Emergency Fund
If your emergency fund took a hit over the holidays, consider using your MIP to replenish it. An emergency fund is vital for covering unexpected expenses like car repairs, medical bills, or home maintenance. Typically, it's recommended to have 3 to 12 months' worth of living expenses saved up, though high-earning professionals with stable incomes may lean towards the shorter end of this range.
4.) Transfer to a High-Yield Account
A notable shift in recent years is the opportunity to earn higher yields on your cash. After your MIP is deposited into your checking account—where it likely earns minimal interest, if any—consider moving it into a Money Market account. Here, you can potentially earn a yield in the 4-5% range while you determine how to allocate it.
5.) Max-Out Retirement Accounts
If you haven't already, consider allocating some of your MIP towards maximizing contributions to Tax Advantage Accounts available to you. These accounts may include your 401(k), Health Savings Account, 529 Plans, Backdoor Roth IRAs, and even a child's Roth IRA. Investing in these accounts can provide tax benefits and help secure your financial future.
6.) Defer MIP via Walmart DCMP
Consider allocating a portion of your MIP towards the Walmart DCMP to streamline your investing and potentially reduce taxes. While you can't adjust this year's MIP payout, you can choose in December 2024 to defer a portion of the MIP earned throughout the calendar year 2025.
7.) Consider Investing in a Passive Index Fund
While tax-advantaged accounts offer benefits, they often lack liquidity. Therefore, investing in an after-tax account that you can access at any time is crucial. When selecting a fund or group of funds, prioritize factors like low cost, diversification, and tax efficiency. For instance, Mutual Funds may distribute capital gains, whereas Exchange-Traded Funds (ETFs) typically do not.
At Taurus Financial Planning, we construct straightforward portfolios consisting of around 10 low-cost, diversified, and tax-efficient index funds. If you're interested in exploring an allocation that matches your objectives, feel free to schedule time on my calendar, and we'll review your investments together.
8.) Treat Yourself Today
While most of these suggestions focus on using your MIP payout to benefit your future self, it's equally important to indulge in something that brings you joy now. If your financial situation is sound, consider allocating a portion of your MIP towards something that brings you happiness without any guilt. After all, taking care of your present self is just as crucial as planning for the future.
The Super Bowl for Salespeople
There's no one-size-fits-all approach to spending your MIP, but it's important to be a good steward of your hard-earned money. Here in Northwest Arkansas, it is common knowledge, especially among salespeople, when Walmart pays out bonuses and equity compensation. This time is akin to the Super Bowl for salespeople, peddling boats, cars, and financial products.
While indulging in luxury items like boats and cars is fun and great, it is a good practice to reflect on how you plan to utilize your MIP before it lands in your checking account. Making thoughtful decisions now can pave the way for a more intentional today and financially secure tomorrow.
Thanks for reading,
Mark Chisenhall, CFA, MBA
Taurus Financial Planning
Taurus Financial Planning is a Fee-Only Wealth Management firm based in Bentonville, AR. The firm offers comprehensive financial planning, tax planning and investment management to corporate executives across the country.
Taurus Financial Planning is a Registered Investment Advisor with the State of Arkansas. This information is provided as a guide to assist you in your financial planning. The specific examples are provided for illustration purposes only and are not representative of specific investments or guarantees of future returns. Please consult with a professional for specific questions regarding your particular situation. If there is any error or inconsistency between this document and the official company plan documents, your company plan documents will govern.
This publication is for informational purposes only and is not intended as tax, accounting or legal advice or as an offer or solicitation of an offer to buy or sell or as an endorsement of any company security fund or other securities or non securities offering. This publication should not be relied upon as the sole factor in an investment making decision. Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made by the Author, in the future, will be profitable or equal the performance noted in this publication.
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