What should I do with my year-end bonus?

Q. I just got a year-end bonus. What's the best way to use it?

A. The most important thing about deciding what to do with a windfall such as a year-end bonus is setting up a list of priorities. And yes, the trip to Vegas should be right at the bottom.

Karen Barnhouse, a certified public accountant and financial planner based in Silver Spring, Md., recommends first paying off high-interest debt such as credit cards, then reducing other kinds of debt such as car loans that may also have interest payments that are not tax-deductible.

"It may not be a real fun way to spend it, but it will go a long way to help insuring their financial future," says Barnhouse, who also serves on the National Financial Literacy Commission of the American Institute of Certified Public Accountants.

Next, look at your taxes. If you're eligible for a traditional IRA or a Roth IRA savings account, think about starting one if you don't already have one, or topping off one that you already have. Investors have until next April 15 to make contributions for the 2004 tax year.

If you want to bring down your taxable income, you could also think about making some charitable contributions by the end of this year - but just be sure to get a receipt for any donations over $250 so you can itemize them on your tax return.

Once you get through all that, if you're close to retirement and are thinking about reducing the size of your estate, remember that you can make gifts of up to $11,000 to any individual each year without the recipient having to declare it as income.

There's no direct tax benefit to the giver, however, other than making one's estate smaller. Paying for another person's tuition or medical expenses can also be done without the monies being counted toward the $11,000 per-person limit on gifts, Barnhouse said.

Paying down some or all of a mortgage is always tempting, but just make sure that you don't have other options available to you that might get you a better return, such as funding a tax-sheltered retirement or education savings account. Remember that you can make a one-time contribution of up to $55,000 to a tax-sheltered 529 college savings plan provided that you don't make any other contributions for five years.

If you've fully funded all of your current financial goals - whether it be managing your debt, saving for retirement and your kids' education, managing your taxes and reducing your estate - well, it might be all right to splurge a little. But just keep your head.

"Basically, be smart with the money," Barnhouse says. "Resist the urge to just spend it without thinking about what you're doing."