Investing Bonus Into 401k - Beyond Limit?

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bmelikia
Posts: 680
Joined: Mon Jun 15, 2009 9:23 pm

Investing Bonus Into 401k - Beyond Limit?

Post by bmelikia »

Is it possible to have your employer contribute an end of year bonus into your 401k after you have already maxed out your contribution limit?

Example: You already maxed out $19,500.00 for the year and get a $25,000 bonus. . .

1) Can that employer put any/all of that money into your 401k?
2) If yes, can that money be put into a Roth option if your company offers both a Roth/Traditional option?

Thank you for your help
"I would rather die with money, than live without it...." - Bogleheads member Ron | | "The greatest enemy of a good plan, is the dream of a perfect plan." | -Bogle
atdharris
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Joined: Wed Jan 02, 2019 3:18 pm

Re: Investing Bonus Into 401k - Beyond Limit?

Post by atdharris »

I believe there are protections in the software that cut off contributions once you max out at $19,500. And you can't contribute to a Roth 401k once you hit the $19,500 limit. Your only option is to fund an IRA or if you already have done that, fund a taxable account
sailaway
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Joined: Fri May 12, 2017 1:11 pm

Re: Investing Bonus Into 401k - Beyond Limit?

Post by sailaway »

Many employers do not allow bonus' to got o 401k at all. Megacorp is pretty generous and they limit it to 50%.

If you can make a contribution, you cannot exceed the $19,500 in Roth + traditional for the year. Often, payroll software will prevent this from happening, but if it does not, measures will need to be taken to reverse the excess contributions.

However, if your 401k allows for non Roth after tax contributions, you could make those contributions. Most people only choose this option if they also have an option to either convert to Roth in plan or to roll the contributions out to a Roth IRA.
Last edited by sailaway on Thu Jun 10, 2021 3:58 pm, edited 1 time in total.
Makefile
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Joined: Fri Apr 22, 2016 11:03 pm

Re: Investing Bonus Into 401k - Beyond Limit?

Post by Makefile »

atdharris wrote: Thu Jun 10, 2021 2:47 pm I believe there are protections in the software that cut off contributions once you max out at $19,500. And you can't contribute to a Roth 401k once you hit the $19,500 limit. Your only option is to fund an IRA or if you already have done that, fund a taxable account
If the plan is structured to allow them, the OP could do an "after tax" (not Roth) contribution. Then there are options to eventually get that into a Roth IRA or 401(k), aka Mega Backdoor Roth.

I think the only other way is if the employer structured it as a "profit sharing contribution" but then I think everyone's would go into the 401(k) and each employee wouldn't have a choice.
ckangas
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Joined: Fri May 21, 2021 8:08 pm

Re: Investing Bonus Into 401k - Beyond Limit?

Post by ckangas »

Another option is to see if you can do after tax contributions. Pending on a few factors, you may be able to eventually do a "Mega Backdoor Roth". Googling it will yield a better explanation than anything I can post here.

For myself, that's the approach I take after our 401K/HSA/Roth IRA are all maxed out; excluding flexibility, it's a better deal for me than a regular taxable account. But obviously everyone is different, and it depends on your employer.

Edit: Looks like Makefile beat me to the suggestion.
KineticSync
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Joined: Tue Jan 15, 2019 11:22 am

Re: Investing Bonus Into 401k - Beyond Limit?

Post by KineticSync »

One other consideration is there if you have employer matching: some employers (my megacorp is one) match on a per paycheck basis, meaning they match up to x% of base salary on each payroll cycle. I discovered that if I maxed out my contributions earlier in the year megacorp stopped matching. Some employers do a "true up" at the end of the year to get you back up to x% match. Mine does not. So I tweak the percentage contribution numbers throughout and at the end of the year to make sure my final check still has enough of a contribution from me to get every last penny of the match.

It was much nicer to max early in the year with bonus money and then have my checks be higher for the rest of the year.

My employer did stop at the correct maximum total for me, including my catch up contribution.
LeslieSmiley
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Joined: Fri May 08, 2015 7:43 pm

Re: Investing Bonus Into 401k - Beyond Limit?

Post by LeslieSmiley »

As many have stated, after-tax contribution is an option. Depending on your plan, if you can make after-tax contribution, the fund might need to stay in the 401k for a certain period of time (months to year) before they can be “mega back door roth’ed” incrementally.
placeholder
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Joined: Tue Aug 06, 2013 12:43 pm

Re: Investing Bonus Into 401k - Beyond Limit?

Post by placeholder »

At megacorp you could put any percentage of your profit sharing bonus into the 401k but it counted against elective deferrals/roth BUT the plan also allowed after tax with a limit of 30% of salary on regular contributions so the bonus (which came early in the year) allowed you to get more total into the plan.
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