Post
by **livesoft** » Sat Dec 17, 2016 1:19 pm

This will depend on how your 401(k) does any matching, if at all.

**So if contributing large amounts to your bonus early in the year causes you to miss out on later matching, then you should think about that.**

I will give the most complicated case; other cases are less complicated.

My spouse has a 401(k) where the most her employer will match is 3% of any paycheck including a bonus. To get that match, my spouse must contribute at least 6% of each separate paycheck including the bonus paycheck. My spouse also wants to contribute $24,000 a year to her 401(k). My spouse's 401(k) does not have something called a "true-up."

On the face of it, if my spouse contributes 6% of each paycheck it looks like it would be easy and get the most match. But 6% of her paycheck will not reach $24,000 which is what she wants to contribute.

If she pays more than 6% of her paycheck into her 401(k), then she may hit the $24,000 limit before the December paychecks, so she will miss out on 3% matches for those paychecks and less money contributed to her 401(k) by her employer because there is no "true-up."

If she sets contribution to just 6%, then when December comes around she will be undercontributed and could not reach $24,000 even if she contributed 100% of her pay to the 401(k).

Unlike you, my spouse's bonus appears in late December, but is not the last paycheck of the year. Since the bonus is unknown and not guaranteed, if she plans on reaching her $24,000 contribution with 26 paychecks, the out-of-band bonus could have her hit $24,000 one paycheck early and lose the match on the last paycheck. OTOH, if she doesn't contribute at least 6% of the bonus amount to her 401(k), then she will lose the full possible 3% match on the bonus. The trick is to then change 401(k) contribution rates in November to make sure there is still enough room below $24,000 to contribute amounts large enough to capture matches from December paychecks and December bonus.

OK, that was too much explanation that you probably did not want to read.

Bottom line: So if contributing large amounts to your bonus early in the year causes you to miss out on later matching, then you should think about that.

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