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Each year we receive the annual bonus check and a paycheck on the same day. The company notifies us that we can make a change to the witholding for 401K. The dates to make the initial change and the date to change it back to it's previous amounts are given so that these 2 checks are the only ones affected.

many people think of this as an opportunity to change the witholding to zero, to get the most they can in their bank account. My goal is to keep as much of it as i can, so does it make more sense to max out the before tax amount, and would it decrease the overall taxable income for the year?

I am in very good financial shape and see this as a "bonus" savings opportunity rather than $$ to use for vacation.

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I'm interested in learning more as well... In years past, I've contributed my bonus up to the 401k company match.

I generally figured out the % to make the max allowable contribution for the year, so a bonus coming along does cause an issue, being I'd hit the max too early due to the extra going into the 401K. This would mean the last couple of pays would have no 401K contribution, and therefore no match by employer.

So if you are not going to get close to the max, you can leave it alone, and even increase the % for the year.

If you are near the max, you should probably drop your % , so your calculations include the bonus and you will be on track to hit the federal max allowed this year.

taking the company match out of the equation, what is the best course of action to minimize Uncle Sam's take of my take?

If you max out your 401k it does not matter when you pay it. Your pay check in the later part of the year might be higher if you already maxed out earlier in the year. Then in January it goes down again, if you can budget for this its not a big deal.
You can now argue about paying more into the plan earlier. The money would be invested for a longer time but at the same time you go a little bit off your dollar cost averaging. But most studies show that there is no real statistical difference if you invest all in January or spread it.
But do keep in mind that company match policies can influence your decision and this should be your largest factor. Check if you loose out on a match if you invest too much now.

you can contribute to a 401k plan from your bonus check? doesn't work the same for my wife's employer.
for example, if her bonus is $1000, they cut 40% for taxes and she receives $600 as her bonus check. Deductions don't come into play.
obviously, if you can deduct, I would follow all the recommendations above.
Either you can adjust your W-4 to decrease withholding for a fortnight or receive more $$$ in the latter part of the year due to early 401k max contribution.
one thing to note, a lot of folks (myself included)maxed out on our 401k contribution last yr because the market had fallen substantially and we made a bet for a rebound. we lucked out (this time atleast!) but it's something to think about....

In all my positions, there was a special election for bonus to 401k.

My bonuses get paid at the beginning of the year (Jan/Feb). I usually put half of the IRS max from bonus, calculate a percentage to get max company match, and then at the end of the year, I do a special election to max my 401K.

One of the good reasons to put more of your bonus money into 401K rather than what your coworkers are doing (more money into bank account) is that 401K is withheld at the Supplemental Wages rate rather than your normal withholding rate. So in effect, if you get your bonus at the beginning of the year, you end up letting the IRS get a longer 0% loan.

(Obviously withholding!=liability)

gordita said: one thing to note, a lot of folks (myself included)maxed out on our 401k contribution last yr because the market had fallen substantially and we made a bet for a rebound. we lucked out (this time atleast!) but it's something to think about....

If you are market timing in your 401K, you are doing something wrong.

Take what I say with a grain of salt. I'm not sure if I remember the all the facts correctly. When I looked at this last year, after seeing a lot of my bonus go away, I found that the bonus (the amount over my normal salary) was taxed at a much higher rate. Since It was all in a single check, I have to assume that it was based on the difference. (I do not know if it was based on the amount being itemized or simply on the difference.) This year, I am increasing my 401K contribution, hoping to guess correctly and bring the same amount of money home. Since I max out my 401K contribution and am also trying to get close to zero on my Federal taxes, I figure that at the end of the year (and after taxes are filed and paid/refunded), everything will be a wash as far as where money is. There will be $22,000 in the 401K and a certain amount to the government based on AGI. Whether the extra went into taxes or 401K, Id want to make later adjustments to achieve both goals. Changing the 401K contributions are much easier (and quicker to make) than changing the number of deductions.
I tried this late last year for a smaller bonus and I think the net tax impact was less, and I funneled more into the 401K, but without more data, its hard to be sure. One thing to be sure of, if you are maxing out your 401K and are concerned about company matches, keep track of it to ensure you are not caught short at the end of the year. Youd hate to miss out on the match because you ran out of contributions.



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