Lump sum contribution to 401k from bonus

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rankl
Posts: 17
Joined: Sun Sep 11, 2011 1:43 am

Lump sum contribution to 401k from bonus

Post by rankl » Sat Dec 17, 2016 12:39 pm

Dear forum members,

Your collective intelligence and expertise in investing has immensely helped my investment goals, I sincerely thank you all for that. I request your input regarding the lump sum contribution to 401k from bonus. We get paid bonus in the January and allowed to contribute to 401k from it, my question is it advisable to contribute lump sum from the bonus ?,if I do I will end up contributing ~$ 9500, remaining will be contributed in equal contributions through out the year.

Any insight is gratefully appreciated.

Thank you and Happy Holidays

dbr
Posts: 23745
Joined: Sun Mar 04, 2007 9:50 am

Re: Lump sum contribution to 401k from bonus

Post by dbr » Sat Dec 17, 2016 1:17 pm

Do you mean you can front load your rate of contribution to the 401K? If so, that is a good idea.

Or, you could mean that the bonus will be an extra company contribution to the 401K, but you can eshew that and take it as taxable income instead. In that case it would be dumb to not take the bonus tax deferred into the 401K. I ask about this because at many companies there are performance sharing bonuses that all the employees get that do go straight into the 401K. That increases their total input to the 401K. However, you many mean a personal bonus of some kind.

livesoft
Posts: 56607
Joined: Thu Mar 01, 2007 8:00 pm

Re: Lump sum contribution to 401k from bonus

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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dbr
Posts: 23745
Joined: Sun Mar 04, 2007 9:50 am

Re: Lump sum contribution to 401k from bonus

Post by dbr » Sat Dec 17, 2016 1:25 pm

Livesoft is correct to have you look at the company match scheme.

Saphomd
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Joined: Tue Apr 03, 2012 6:11 pm
Location: SF, CA

Re: Lump sum contribution to 401k from bonus

Post by Saphomd » Sat Dec 17, 2016 1:32 pm


rankl
Posts: 17
Joined: Sun Sep 11, 2011 1:43 am

Re: Lump sum contribution to 401k from bonus

Post by rankl » Sat Dec 17, 2016 2:06 pm

Thank you for your replies

dbr wrote:Do you mean you can front load your rate of contribution to the 401K? If so, that is a good idea.


Yes it is a front load to 401k contribution.

livesoft wrote: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.
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Thanks for detailed example, fortunately our company matches one time in Feb of the following year, hence will get full match as long as you meet requirement.

Saphomd wrote:https://personal.vanguard.com/us/insights/audio/3745-ICPodcast-Invest-Now-or-Hold


thanks for the link.

Will go with contributing from bonus.

cherijoh
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Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Lump sum contribution to 401k from bonus

Post by cherijoh » Sat Dec 17, 2016 2:27 pm

rankl wrote:Dear forum members,

Your collective intelligence and expertise in investing has immensely helped my investment goals, I sincerely thank you all for that. I request your input regarding the lump sum contribution to 401k from bonus. We get paid bonus in the January and allowed to contribute to 401k from it, my question is it advisable to contribute lump sum from the bonus ?,if I do I will end up contributing ~$ 9500, remaining will be contributed in equal contributions through out the year.

Any insight is gratefully appreciated.

Thank you and Happy Holidays


We get our "bonus" in first pay period in February. We also get our new salary at the same time. I have increased the % going into my 401k the last few years so that I can front-load my 401k. After the bonus is paid and I know my new paycheck amount, I reduce my contribution so that I still get the full match in my final paycheck but also hit the max limit. Our plan allows contributions from 1% to 75% of a given paycheck although you need to contribute 5% to get the full match. Since you can't do fractional percentages (e.g., 7.5% is not permitted), I usually check around October to make sure that I will actually get the full match AND hit my limit in the final paycheck.

In 2015, I would have been slightly better off if I had made level contributions, but for 2016 I more than made up for it due to the dip in stock price in the 1Q with subsequent stock market increases. I plan to do the same thing for 2017 - as a matter of fact this is a good reminder to go in and change my contribution limits.

Another impact of front loading is that should you lose your job mid year, you will contribute more in the time you were working. This could be either a good or a bad thing. If you don't have a large emergency fund you might regret tying the money up. Also some people find another job that has a more favorable matching scheme and then they wish that they had waited. On the other hand, you may be glad that you got the extra money in if you have limited options for future contributions.

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Earl Lemongrab
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Re: Lump sum contribution to 401k from bonus

Post by Earl Lemongrab » Sat Dec 17, 2016 5:41 pm

I put 100% of the profit-sharing bonus into the 401(k). We are limited in our contributions to 30%, so this helps fill up deferred earlier and get started on after-tax that much sooner.

Next year will in all likelihood be a short year for me, so then it becomes a way to put more in than I would normally be able to. A win either way.
This week's fortune cookie: "You will do well to expand your horizons." Ow. Passive-aggressive and vaguely ominous.

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