401(k) employer match and tax question

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CrazyCatLady
Posts: 58
Joined: Mon Apr 30, 2018 9:19 pm

401(k) employer match and tax question

Post by CrazyCatLady » Wed Jun 13, 2018 8:08 am

We are going to be getting out first half bonus soon, and I'm trying to figure out the smartest way to accept it.

Our 401(k) is a profit sharing 401(k) so if you get a bonus you can elect to put it in the "bucket" and instead of being paid out to you, it gets deposited in your 401(k). However, it won't be deposited until April of the next year after the accounting department runs all their tests and determines the plan is not top heavy.

My student loans will be paid off before the end of the year and thereafter I will deposit my monthly loan payment in a taxable brokerage account. My goal is to save at least $65,000 per year (though preferably closer to $80,000) between 401(k), backdoor Roth IRA and taxable account.

This is my question. Everything I have read on the forum says that you should max out tax advantaged contributions before making taxable investments, so I wonder if I should take advantage of the bucket to deposit the full 55k in my 401(k) before putting money in my taxable account, regardless of whether or not I end up in the 32% bracket. That would mean putting a total of about $30k in the bucket each year until I hit 50 and then it would be about $24k to the bucket because of the catchup (and again, no 4% match on amounts in the bucket). I think I'll hit FIRE between 57-59 if I meet my savings goals. Does that change the analysis?

Other relevant info:

Age: 48 by year-end
Status: single
State tax: 5.5%
Deductions: will use standard
Debt: student loan and car paid by year end. 9 years left on 3% mortgage (PITI less than $1k per month),
Current Portfolio: mid-six figures. Current allocation 45% total stock market, 5% small cap growth, 25% developed markets, 25% total bond market. As my taxable account grows i will buy total international in taxable and reduce dev markets in 401(k) while increasing bonds up to 30% (shout out to retiredjg for helping me fix my allocation :)). Approximately 21% is Roth 401(k) or Roth IRA.
Retirement Date: as soon as I can, but definitely by 62
Expenses: about $40k per year (ignoring student loan payments since they'll be gone by year end). I estimate $50k in retirement (so likely 22% bracket)
Emergency Fund: currently 8 months in high yield savings. Jumps to about 14 months when student loans are paid off. Plan to use $10k to buy I bonds in December.
Last edited by CrazyCatLady on Wed Jun 13, 2018 5:45 pm, edited 1 time in total.

magicrat
Posts: 410
Joined: Sat Nov 29, 2014 7:04 pm

Re: 401(k) employer match and tax question

Post by magicrat » Wed Jun 13, 2018 9:02 am

You can defer $18.5k pre-tax. If you want to save $65k per year, you should be doing this regardless of the bonus. Your post is a bit confusing. Are you sure this isn't a deferred compensation plan?

CrazyCatLady
Posts: 58
Joined: Mon Apr 30, 2018 9:19 pm

Re: 401(k) employer match and tax question

Post by CrazyCatLady » Wed Jun 13, 2018 9:43 am

magicrat wrote:
Wed Jun 13, 2018 9:02 am
You can defer $18.5k pre-tax. If you want to save $65k per year, you should be doing this regardless of the bonus. Your post is a bit confusing. Are you sure this isn't a deferred compensation plan?
Yes, I already do the $18,500 employee match. What I am curious about is if I should use my bonuses to fund the employer contribution portion of my 401(k) up to the maximum $55k contribution per year via profit sharing. I can do this because I'm an owner (forgot to say that in the original post :)). And to be totally accurate, they are considered "distributions", not bonuses, but I consider them to be bonuses :) If I don't use my bonuses to fund the employer portion/profit sharing, my company will only match 4% of my salary so that makes total 401(k) contributions per year about $24,500.

We don't have a deferred comp plan (but that would be nice!! :))

I agree on saving the full $65,000 regardless. That'll happen as soon as I make my last student loan payment (since I'm used to living without that money anyway :))

I guess what I'm asking is from a tax perspective is it better to save each year (a) $55,000 in my 401(k) (employer and employee contributions), $5,500 in a backdoor Roth IRA, and $5,000-$15,000 in a taxable brokerage account or (b) $24,500 in 401(k) (employer or employer contributions), $5,500 in a backdoor Roth, and $35,000-$50,000 in a taxable brokerage account.

Does that make more sense? If not, please let me know! I'm not asking about the mechanics of the bucket (I've done it for the past 3-4 years so I know it works), I'm just trying to figure out if it advantageous to put more money in the bucket. I do lose the 4% match on the bucket amounts, but I'm thinking the tax benefits may outweigh that. Thanks!! :)

magicrat
Posts: 410
Joined: Sat Nov 29, 2014 7:04 pm

Re: 401(k) employer match and tax question

Post by magicrat » Wed Jun 13, 2018 9:50 am

CrazyCatLady wrote:
Wed Jun 13, 2018 9:43 am
magicrat wrote:
Wed Jun 13, 2018 9:02 am
You can defer $18.5k pre-tax. If you want to save $65k per year, you should be doing this regardless of the bonus. Your post is a bit confusing. Are you sure this isn't a deferred compensation plan?
I guess what I'm asking is from a tax perspective is it better to save each year (a) $55,000 in my 401(k) (employer and employee contributions), $5,500 in a backdoor Roth IRA, and $5,000-$15,000 in a taxable brokerage account or (b) $24,500 in 401(k) (employer or employer contributions), $5,500 in a backdoor Roth, and $35,000-$50,000 in a taxable brokerage account.
(a)

CrazyCatLady
Posts: 58
Joined: Mon Apr 30, 2018 9:19 pm

Re: 401(k) employer match and tax question

Post by CrazyCatLady » Wed Jun 13, 2018 11:57 am

magicrat wrote:
Wed Jun 13, 2018 9:50 am
CrazyCatLady wrote:
Wed Jun 13, 2018 9:43 am
magicrat wrote:
Wed Jun 13, 2018 9:02 am
You can defer $18.5k pre-tax. If you want to save $65k per year, you should be doing this regardless of the bonus. Your post is a bit confusing. Are you sure this isn't a deferred compensation plan?
I guess what I'm asking is from a tax perspective is it better to save each year (a) $55,000 in my 401(k) (employer and employee contributions), $5,500 in a backdoor Roth IRA, and $5,000-$15,000 in a taxable brokerage account or (b) $24,500 in 401(k) (employer or employer contributions), $5,500 in a backdoor Roth, and $35,000-$50,000 in a taxable brokerage account.
(a)
Perfect, that is what I assumed. Thank you very much!! :)

Flyer24
Posts: 266
Joined: Sun Apr 08, 2018 4:21 pm

Re: 401(k) employer match and tax question

Post by Flyer24 » Wed Jun 13, 2018 12:04 pm

My company allows us to defer our profit sharing bonus into our 401k. However, it goes against your $18,500 limit. It counts the same as a personal contribution. It is not an employer contribution.
Last edited by Flyer24 on Wed Jun 13, 2018 12:17 pm, edited 1 time in total.

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Earl Lemongrab
Posts: 5410
Joined: Tue Jun 10, 2014 1:14 am

Re: 401(k) employer match and tax question

Post by Earl Lemongrab » Wed Jun 13, 2018 12:15 pm

The way it worked at Megacorp was that you could defer (or put into Roth) the profit-sharing bonus. As mentioned above, it counted against your 18.5k limit, as it was employee discretion. It was not matched. However, Megacorp allowed after-tax which would start as soon as the pretax/Roth limit was reached.

So the net effect was that the bonus got me to after-tax (Mega Backdoor Roth) sooner and able to do more. Megacorp had limit of 30% on contributions, but the bonus didn't figure into that. So in essence, if I got 3k in bonus, I'd end up with an extra 3k in Roth IRA.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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