Bonus contribution to 401k

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doon
Posts: 89
Joined: Tue May 27, 2014 9:25 am

Bonus contribution to 401k

Post by doon » Tue Feb 20, 2018 10:35 am

My firm has given an option to select a percentage of bonus to be contributed to 401k. I dont

Is there any downside to it other than not having bonus money in my hand?

Company match does not happen with each pay check rather it is end of year match. So I will not have an issue with that aspect.

Thanks for your inputs.
"Goal - Win the game before the need to retire"

SoCalT
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Joined: Sun Feb 04, 2018 9:53 pm

Re: Bonus contribution to 401k

Post by SoCalT » Tue Feb 20, 2018 11:12 am

Bonuses get taxed pretty hard more than a regular paycheck so I would opt for as much as I can since it's tax deferred.

nolesrule
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Joined: Thu Feb 26, 2015 10:59 am

Re: Bonus contribution to 401k

Post by nolesrule » Tue Feb 20, 2018 11:24 am

SoCalT wrote:
Tue Feb 20, 2018 11:12 am
Bonuses get taxed pretty hard more than a regular paycheck so I would opt for as much as I can since it's tax deferred.
When it comes to tax liability, it won't make a difference. It'll all net out in the end with the tax return, assuming that the OP is deferring the same amount for the year regardless of the bonus. The difference will be in the withholding.


So that's the real question... is the OP already planning to max out 401k contributions anyway? Or is the bonus enabling the ability to increase deferrals compared to without the bonus?

The other consideration is time in market...

doon
Posts: 89
Joined: Tue May 27, 2014 9:25 am

Re: Bonus contribution to 401k

Post by doon » Tue Feb 20, 2018 11:28 am

nolesrule wrote:
Tue Feb 20, 2018 11:24 am
SoCalT wrote:
Tue Feb 20, 2018 11:12 am
Bonuses get taxed pretty hard more than a regular paycheck so I would opt for as much as I can since it's tax deferred.
When it comes to tax liability, it won't make a difference. It'll all net out in the end with the tax return, assuming that the OP is deferring the same amount for the year regardless of the bonus. The difference will be in the withholding.


So that's the real question... is the OP already planning to max out 401k contributions anyway? Or is the bonus enabling the ability to increase deferrals compared to without the bonus?

The other consideration is time in market...
Planning to max out 401 k for 2018. All this will do is to front load the max now instead of middle of the year if done through regular pay check. I agree overall tax wise it will not make a difference.
"Goal - Win the game before the need to retire"

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oldcomputerguy
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Re: Bonus contribution to 401k

Post by oldcomputerguy » Tue Feb 20, 2018 11:28 am

SoCalT wrote:
Tue Feb 20, 2018 11:12 am
Bonuses get taxed pretty hard more than a regular paycheck so I would opt for as much as I can since it's tax deferred.
+1 on this. Under IRS rules, the employer can either (a) aggregate the bonus with your regular wage and use the calculation normally used to calculate withholding (which takes W-4 allowances and additional withholding requests into account), or do what amounts to a withholding completely at your marginal rate (with no allowances or additional withholding calculated in).

I did a check of my last bonus received, and my employer withheld 25% of the gross as my withholding, which is higher than my normal bimonthly withholding was.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

thangngo
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Re: Bonus contribution to 401k

Post by thangngo » Tue Feb 20, 2018 11:37 am

doon wrote:
Tue Feb 20, 2018 10:35 am
My firm has given an option to select a percentage of bonus to be contributed to 401k. I dont

Is there any downside to it other than not having bonus money in my hand?

Company match does not happen with each pay check rather it is end of year match. So I will not have an issue with that aspect.

Thanks for your inputs.
If you ask me, save it all. Max out your 401k. If you still have some left, put it to Roth IRA and then taxable account.

If you spend any of your bonus money, you did a bad job at saving, or managing your monthly cashflows, or both. :twisted:

Ragnoth
Posts: 118
Joined: Sat Sep 17, 2016 8:10 am

Re: Bonus contribution to 401k

Post by Ragnoth » Tue Feb 20, 2018 12:05 pm

oldcomputerguy wrote:
Tue Feb 20, 2018 11:28 am
SoCalT wrote:
Tue Feb 20, 2018 11:12 am
Bonuses get taxed pretty hard more than a regular paycheck so I would opt for as much as I can since it's tax deferred.
+1 on this. Under IRS rules, the employer can either (a) aggregate the bonus with your regular wage and use the calculation normally used to calculate withholding (which takes W-4 allowances and additional withholding requests into account), or do what amounts to a withholding completely at your marginal rate (with no allowances or additional withholding calculated in).

I did a check of my last bonus received, and my employer withheld 25% of the gross as my withholding, which is higher than my normal bimonthly withholding was.
When people talk about deferring taxes, the goal is to take deductions as early as you can, and to delay payment of taxes as long as possible (ideally for years at a time).

If you were really trying to optimize things, the *vast* majority of people are better off frontloading 401k contributions, and get the deductions as early in the year as possible. The difference in withholding rates changes the numbers slightly, but it’s difficult to think of a realistic situation where the numbers are so drastic that you are better off delaying contributions to use the tax-advantages space for bonus money.

To reiterate for the OP, the amount withheld for bonus payments follows special rules, but it does *not* change the amount of taxes due. There is unlikely to be any serious detrimental effects from using bonus money to make 401k contributions (and you can think about it like any other paycheck).

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Earl Lemongrab
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Re: Bonus contribution to 401k

Post by Earl Lemongrab » Tue Feb 20, 2018 1:11 pm

At Megacorp, you could put any percentage of the bonus into the 401(k). It counted as elective deferral or Roth (depending on what you chose). It did not get matched, so one had to be careful about getting full match. However, the plan allowed after-tax and in fact switched to that when the deferral limit was reached. So putting the bonus in early in the year had the effect of reaching after-tax sooner and resulting in more Mega Backdoor Roth.
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Random Poster
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Re: Bonus contribution to 401k

Post by Random Poster » Tue Feb 20, 2018 1:21 pm

Ragnoth wrote:
Tue Feb 20, 2018 12:05 pm
If you were really trying to optimize things, the *vast* majority of people are better off frontloading 401k contributions, and get the deductions as early in the year as possible.
Frontloading 401K contributions is also beneficial in case one gets laid off or otherwise leaves employment sometime during the year, as doing so might allow one to fully fund the 401k for the year even without a full year's worth of employment.

Random Poster
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Re: Bonus contribution to 401k

Post by Random Poster » Tue Feb 20, 2018 1:23 pm

oldcomputerguy wrote:
Tue Feb 20, 2018 11:28 am
I did a check of my last bonus received, and my employer withheld 25% of the gross as my withholding, which is higher than my normal bimonthly withholding was.
Not that it really matters much, but the flat withholding percentage on "supplemental wages" under $1M that aren't paid with one's regular wages is now 22%, thanks to the new tax law.

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