Author Topic: Bonus check: front load 401k?  (Read 3250 times)

spud1987

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Bonus check: front load 401k?
« on: February 03, 2016, 02:21:17 PM »
I'm just wondering if I am missing anything in my analysis. I have a large bonus coming next month (around 35k) and am trying to figure out how to spend (ie save) it.

Relevant facts:

  • My company permits 401k contributions from bonus checks
  • My company matches on bonuses
  • My company matches for the full year even if the employee maxes his/her pretax 401k before year end (so long as the employee does not max the total 54k amount in pre/Roth/post/match funds per year)
  • I will max out my pretax 401k (18k) this year. I will also contribute the max to my aftertax 401k in order to take advantage of the megaRoth option (another 19k). I will receive another 15k or so in match. Any extra savings will go to my taxable account.

My question is whether it makes sense to frontload my pretax and/or aftertax contributions using the bonus check. Then I will use my larger paychecks the rest of the year to contribute to my taxable account. The alternative is to continue contributing to my 401k throughout the year and investing a larger amount in my taxable account when I get my bonus.

Are there any benefits to either option? I think the total amount invested at the end of the year will be the same. If I did lose my job before the end of the year it would be nice to have my 401k maxed already, but this is a pretty minor consideration.[/list]

johnny847

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Re: Bonus check: front load 401k?
« Reply #1 on: February 03, 2016, 02:27:12 PM »
On average, lump sum investing beats DCA 2/3 of the time.

But for 401k front loading there are more things to consider.
What if you switch employers this year and your new employer gives you a better match?
Conversely, you may be laid off this year and not be able to find a job.
They may switch 401k custodians or funds available to funds so bad that it makes more sense to invest in a taxable account instead (I'm assuming you max your IRA first in this situation).

There's probably more things to consider but these are the ones that come to mind right now

Gone Fishing

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Re: Bonus check: front load 401k?
« Reply #2 on: February 03, 2016, 02:40:24 PM »
My response from a similar thread:


Assuming the frontloaded funds would have been otherwise invested in taxable investments, this might actually result in increased future taxes in the event 401(k) gains are taxed at a higher rate than the gains on the taxable investments.  Don't have time to run any comparisons but my gut is that for someone on the MMM plan, the difference would be pretty minimal as long as the favorable dividend/cap gains rates remain in effect.  The (best?) reason to frontload is to hedge against job loss which could impair 401(k) contributions for at least some period of time, assuming someone has enough in a taxable account or ROTH contributions on hand to fund living expenses.

The entire thread if you want to read it:

http://forum.mrmoneymustache.com/welcome-to-the-forum/frontloading-401k-2016/

ooeei

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Re: Bonus check: front load 401k?
« Reply #3 on: February 03, 2016, 02:41:33 PM »
On average, lump sum investing beats DCA 2/3 of the time.

But for 401k front loading there are more things to consider.
What if you switch employers this year and your new employer gives you a better match?

In that case you contribute at the new job, and at the end of a year send a letter to the old provider stating you accidentally over-contributed, and need to remove your contributions for that year.  I read about it on a financial blog, can't remember which one though.


Gone Fishing

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Re: Bonus check: front load 401k?
« Reply #4 on: February 03, 2016, 02:42:55 PM »
On average, lump sum investing beats DCA 2/3 of the time.

But for 401k front loading there are more things to consider.
What if you switch employers this year and your new employer gives you a better match?

In that case you contribute at the new job, and at the end of a year send a letter to the old provider stating you accidentally over-contributed, and need to remove your contributions for that year.  I read about it on a financial blog, can't remember which one though.

Slick move!

spud1987

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Re: Bonus check: front load 401k?
« Reply #5 on: February 03, 2016, 03:21:59 PM »
My response from a similar thread:


Assuming the frontloaded funds would have been otherwise invested in taxable investments, this might actually result in increased future taxes in the event 401(k) gains are taxed at a higher rate than the gains on the taxable investments.  Don't have time to run any comparisons but my gut is that for someone on the MMM plan, the difference would be pretty minimal as long as the favorable dividend/cap gains rates remain in effect.  The (best?) reason to frontload is to hedge against job loss which could impair 401(k) contributions for at least some period of time, assuming someone has enough in a taxable account or ROTH contributions on hand to fund living expenses.

The entire thread if you want to read it:

http://forum.mrmoneymustache.com/welcome-to-the-forum/frontloading-401k-2016/

Thanks! I guess this consideration should have some added weight for me since my current plan allows aftertax contributions and in-service withdrawals making the mega Roth an option. Not all 401ks (most?) have this feature so it may not be available if I switch jobs.

johnny847

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Re: Bonus check: front load 401k?
« Reply #6 on: February 03, 2016, 09:41:21 PM »
On average, lump sum investing beats DCA 2/3 of the time.

But for 401k front loading there are more things to consider.
What if you switch employers this year and your new employer gives you a better match?

In that case you contribute at the new job, and at the end of a year send a letter to the old provider stating you accidentally over-contributed, and need to remove your contributions for that year.  I read about it on a financial blog, can't remember which one though.

Slick move!

Oh interesting. I'll have to read into that (not that I have a 401k but that's a neat trick).

ooeei

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Re: Bonus check: front load 401k?
« Reply #7 on: February 04, 2016, 06:41:11 AM »
On average, lump sum investing beats DCA 2/3 of the time.

But for 401k front loading there are more things to consider.
What if you switch employers this year and your new employer gives you a better match?

In that case you contribute at the new job, and at the end of a year send a letter to the old provider stating you accidentally over-contributed, and need to remove your contributions for that year.  I read about it on a financial blog, can't remember which one though.

Slick move!

Oh interesting. I'll have to read into that (not that I have a 401k but that's a neat trick).

http://20somethingfinance.com/over-contribute-to-a-401k/ is where I first read about it.  I've never done it, so it's worth doing more research if this is anyone's plan.

spud1987

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Re: Bonus check: front load 401k?
« Reply #8 on: February 04, 2016, 10:32:35 AM »
On average, lump sum investing beats DCA 2/3 of the time.

But for 401k front loading there are more things to consider.
What if you switch employers this year and your new employer gives you a better match?

In that case you contribute at the new job, and at the end of a year send a letter to the old provider stating you accidentally over-contributed, and need to remove your contributions for that year.  I read about it on a financial blog, can't remember which one though.

Slick move!

Oh interesting. I'll have to read into that (not that I have a 401k but that's a neat trick).

http://20somethingfinance.com/over-contribute-to-a-401k/ is where I first read about it.  I've never done it, so it's worth doing more research if this is anyone's plan.

As a sidenote, this same principle can be used in FIRE for those considering a Roth conversion pipeline. You simply overestimate the amount of Roth conversion you'll need (say you estimate that you'll be able to recognize 20k in income due to a Roth conversion. you would convert 22k.) and then recharacterize the following tax year before you file your return based on your actual needs.

This is especially useful if you are planning to stay below certain dollar amounts for either obamacare subsidies or the capital gains/dividend 0% limit.

I think MadFientist wrote something about this (like he has everything else tax related, lol).

PhysicianOnFIRE

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Re: Bonus check: front load 401k?
« Reply #9 on: February 04, 2016, 09:44:47 PM »
Check with HR / plan admistrator before completely frontloading the 401(k) if you receive a company match. 

You may have to be putting money into your 401(k) with each check in order to me "matched". 

Last year, I checked with HR and told them my plan.  I specifically asked whether or not the company would continue the match if I was done contributing for the year and I was told "yes".

Lo ad behold, when I stopped contributing (because I had maxed out the 401(k), the company stopped matching.  I inquired again and they said Oh, sorry, you'll get a true up early next year.

It's early next year and I just called and apparently they're still "working on it".  The silver lining is that the market is lower than it was for most of last year, so I'll actually come out ahead by having the "match" invested now, as opposed to buying in throughout the year last year when valuations were higher.  That's just dumb luck though.