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Increase 401k contrib pct before last bonus payout?
Old 01-15-2018, 03:42 PM   #1
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Increase 401k contrib pct before last bonus payout?

Right now I am leaning toward a 6/1/18 retirement date, which is also my 59 1/2 birthday. With that date in mind, I am wondering if it makes sense to increase my 401k contribution percentage (e.g., to 50%) right before our annual bonuses are paid out in March in order to shield it as much as possible from the tax man. Or is this a dumb question and that's what all of you have been doing all these years?

Are there any other 'strategies or moves' I should consider in terms of my 401k as the retirement date nears?
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Old 01-15-2018, 03:47 PM   #2
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Originally Posted by Carpediem View Post
Right now I am leaning toward a 6/1/18 retirement date, which is also my 59 1/2 birthday. With that date in mind, I am wondering if it makes sense to increase my 401k contribution percentage (e.g., to 50%) right before our annual bonuses are paid out in March in order to shield it as much as possible from the tax man.
If you are permitted to do so, and if you are in a tax bracket where that is advantageous, then it makes complete sense. You should check to be sure that they will be taking 401k contributions out of your bonus payment.

My wife contributes more than half her salary to her 401k in order to max it out. It took a few rounds of convincing the payroll service that she really did want all that taken out, but it got done.

This defers a lot of money into the 401k, and also keeps our MAGI low enough to qualify for ACA subsidies.
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Old 01-15-2018, 03:51 PM   #3
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You should check to be sure that they will be taking 401k contributions out of your bonus payment.
Yes, the bonus amount gets added to the regular bi-weekly paycheck and all deductions are withheld as normal, including 401k.
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Old 01-15-2018, 03:51 PM   #4
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Only a half year salary. Might this be an opportunity to increase your after-tax savings? It really depends on what you expect for a marginal tax rate this year.
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Old 01-15-2018, 03:57 PM   #5
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Only a half year salary. Might this be an opportunity to increase your after-tax savings? It really depends on what you expect for a marginal tax rate this year.
Glad you brought up the after-tax savings. Our investment structure is less than ideal IMO. Traditional IRAs make up roughly 95% of our overall investments. The rest of the breakdown is something like 3% cash and 2% ROTH IRA.

Should I consider only contributing up to the employer match to my 401k and start building up my cash reserve?

Our effective tax rate for 2016 was 8.73%.
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Old 01-15-2018, 04:11 PM   #6
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Glad you brought up the after-tax savings. Our investment structure is less than ideal IMO. Traditional IRAs make up roughly 95% of our overall investments. The rest of the breakdown is something like 3% cash and 2% ROTH IRA.

Should I consider only contributing up to the employer match to my 401k and start building up my cash reserve?

Our effective tax rate for 2016 was 8.73%.
Not enough ROTH type IRA and too much tIRA is one of the biggest complaints people express here at ER Forum. It really depends on what you expect your tax rate to be once you are drawing both SS and RMDs. There's nothing you can do then to lower your tax burden, but right now you have a chance to redirect some income into after tax saving, and also convert some of the tIRA to ROTH, especially if your current rate continues that low.
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Old 01-15-2018, 04:21 PM   #7
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... especially if your current rate continues that low.
Alimony payments for the next 3.5 years so yeah, our tax rate will be 'favorable' for a few more years.
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Old 01-15-2018, 04:26 PM   #8
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Something to consider is making an adjustment to your payroll federal income tax deductions. If you are only going to be earning for 6 months, but the tax rate is based on the full year, you should be able to reduce the withholding accordingly. Add on top of that, a substantial 401K contribution and your tax for this year will be a lot less than the rate your paycheck is projecting it would be.
My final year I worked, I went exempt for federal and state income taxes, maxxed out with 100% of my salary starting at the first of the year, and when I hit the limits, I reinstated the Fed and State taxes. At that time of the year, my taxes were based on how much I would earn for the rest of the tax year, appreciably less than what they were calculated for the full year. This is only doable if you have the cash on hand to cover your expenses while maxxing out the 401K limits. But even if you don't, you can borrow from your 401K, say $50,000, and then put your whole paycheck back into your 401K until it's maxxed out for the year and at the start of your retirement, anything not paid back on that loan is just considered your first draw.


****EDIT****
I also don't recommend leaving funds in the 401K after retirement. Some businesses consider this on their ledger in THEIR black column. Meaning; they consider it their money until it's distributed to you. If anything crashes, and the business declares bankruptcy, you might be standing in line with others who are still owed money. I think the law varies state by state on that though.
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Old 01-15-2018, 04:33 PM   #9
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Alimony payments for the next 3.5 years so yeah, our tax rate will be 'favorable' for a few more years.
Didn't the new tax law take away alimony deductibility?
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Old 01-15-2018, 04:40 PM   #10
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Didn't the new tax law take away alimony deductibility?
Only divorces that take place after 12/31/18.
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Old 01-15-2018, 04:42 PM   #11
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Only divorces that take place after 12/31/18.
I wonder if divorce lawyers will start offering end-of-year specials....
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Old 01-15-2018, 04:45 PM   #12
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One issue with doing a big amount all at once like that is that the employer match is in terms of some percentage of each paycheck (I think 3 or 6%) and doing that way you could lose some part of that match.
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Old 01-15-2018, 04:52 PM   #13
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One issue with doing a big amount all at once like that is that the employer match is in terms of some percentage of each paycheck (I think 3 or 6%) and doing that way you could lose some part of that match.
My employer's match is 6%. Are you saying some employers have rules about employee contribution percentages and how it might affect the company match? If so, I've not heard of it and would need to look into that.
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Old 01-15-2018, 04:54 PM   #14
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My employer's match is 6%. Are you saying some employers have rules about employee contribution percentages and how it might affect the company match? If so, I've not heard of it and would need to look into that.
Definitely needs checking out. Many (most?) employers limit the match as mostlydone described.
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Old 01-15-2018, 05:01 PM   #15
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Personally, I'd lean towards maxing the 401k contribution.

And as @joeea pointed out, I would double check to make sure your contribution wishes are carried out on a bonus check. The payroll services and software I have used require that 401k contributions are specifically enabled on a bonus check run.
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Old 01-15-2018, 05:07 PM   #16
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As mentioned previously, our bonuses are not paid on a special / separate check or payroll run. The bonus is combined with a regular bi-weekly paycheck.
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Old 01-15-2018, 05:08 PM   #17
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One issue with doing a big amount all at once like that is that the employer match is in terms of some percentage of each paycheck (I think 3 or 6%) and doing that way you could lose some part of that match.
My employer started each year with a fixed amount of matching funds at dollar-for-dollar until it ran out. I could actually sell back unused vacation at the start of the new year, tag it for the 401K and double tap to my account. I could also borrow from my 401K for expenses, then put my whole paycheck into the 401K to get the full maximum contribution allowed and the match funds, and pay back the loan with paycheck deductions later that year. This was only possible with LBYM discipline, a lot of overtime pay and a paid-off mortgage.
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Old 01-15-2018, 06:01 PM   #18
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Old 01-15-2018, 06:07 PM   #19
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My employer's match is 6%. Are you saying some employers have rules about employee contribution percentages and how it might affect the company match? If so, I've not heard of it and would need to look into that.
I don't think they limit your contribution but if for example you were paid $10,000 per pay period, allocated 50% to the 401k, the employer match which caps at 6% would be $600 and my employer at least does not catch up on the match. So after 5 pay periods I would hit the 24,500 limit and only gotten $3000 in matching funds.
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