Author Topic: Got my bonus-what would you do in my shoes?  (Read 6362 times)

cashstasherat23

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Got my bonus-what would you do in my shoes?
« on: February 05, 2015, 10:31:50 AM »
So today I had my first ever compensation and bonus discussion, following my first ever yearly review a few weeks ago!

While it was not quite the increase I was hoping for, I think I got a pretty reasonable salary increase for my non-profit, about 2.2%.

However, the big surprise was my bonus! I will be receiving $2K as a bonus.

Going in to the meeting, I had an idea in my head about what I would do with my bonus, regardless of amount-put it all towards student loans. However, in the meeting I was told that I also have the option to contribute up to 75% of that bonus into my 401K, which has made me want to consider all options before making a decision. Stats on my student loans and my 401K are below:

$4,996.16    3.15%
$5,811.54    6.55%
$4,310.71    6.55%
$2,092.03    6.55%
$5,064.94    3.15%
$1,537.01    6.55%
Total: $23,812.39

401K:
$2,355 in account to date
$1,183 company contribution being put in account
Recently discovered that I have a high-fee account, with fees ranging from .61% at the lowest to 1.45% at the highest.


My question is, what would you do with the money? I still think the best thing to do would be to take that bonus, completely kill one loan, and get started on another! Am I wrong?

Guizmo

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Re: Got my bonus-what would you do in my shoes?
« Reply #1 on: February 05, 2015, 10:36:55 AM »
with 6.5% student loans, I'd definitely pay down that debt first before putting it in the 401k.

frugaldrummer

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Re: Got my bonus-what would you do in my shoes?
« Reply #2 on: February 05, 2015, 10:39:09 AM »
Ditto - use the debt snowball method, pay off that $2090 loan at 6.55%, than apply the money that was going to that loan payment to the $1700 loan etc.

frugaldrummer

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Re: Got my bonus-what would you do in my shoes?
« Reply #3 on: February 05, 2015, 10:39:57 AM »
Assuming, of course, that you have an emergency fund in place already?  If not, I'd make this your emergency fund.

ShoulderThingThatGoesUp

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Re: Got my bonus-what would you do in my shoes?
« Reply #4 on: February 05, 2015, 10:41:15 AM »
After tax you should have enough from the bonus to through that $1532 loan balance at 6.55% in the garbage. Are you putting enough into the 401k to at least get the match?

cashstasherat23

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Re: Got my bonus-what would you do in my shoes?
« Reply #5 on: February 05, 2015, 10:46:20 AM »
A bit more info:

I am working on the snowball method for my loans. The $1,500 loan started at $2,000, and I have been working on paying it off first. Last year I was just making minimum payments, but this year have made it my goal to eliminate all student loans.

As for the 401K, I am putting in 11% of my salary, and my company puts in 3% of my salary regardless of whether I contribute or not. After eliminating all student debts this year, I intend to max out the 401K next year.

Yes, I have an e-fund!

Thank you all for the responses. Glad to know that I was on the right track with paying off the loans first.

terran

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Re: Got my bonus-what would you do in my shoes?
« Reply #6 on: February 05, 2015, 11:46:13 AM »
Not related to your bonus/loan repayment, but given that your 401k is on the high-fee side you might consider diverting enough of your 401k contribution to fill up an IRA first, then go back to contributing to the 401k. That way you could have $5500/year going into something with low fees.

cashstasherat23

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Re: Got my bonus-what would you do in my shoes?
« Reply #7 on: February 05, 2015, 11:50:16 AM »
Not related to your bonus/loan repayment, but given that your 401k is on the high-fee side you might consider diverting enough of your 401k contribution to fill up an IRA first, then go back to contributing to the 401k. That way you could have $5500/year going into something with low fees.

Terran, thanks for this! I was just clued in yesterday to looking at the fees on my 401K, so the IRA is definitely something I am thinking about for this year. Would the costs of taxes just cancel out any benefit of this though?

neo von retorch

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Re: Got my bonus-what would you do in my shoes?
« Reply #8 on: February 05, 2015, 12:06:14 PM »
Not sure what your income / tax situation is. Seems like if taxes are 25%+ on your bonus, and down the road you may hope to do a Roth conversion pipeline and minimize taxes, it might make the most sense to dump as much of the bonus into your 401k as possible. (Unless I'm misunderstanding and you'd still somehow pay taxes on it?)

cashstasherat23

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Re: Got my bonus-what would you do in my shoes?
« Reply #9 on: February 05, 2015, 12:34:24 PM »
Not sure what your income / tax situation is. Seems like if taxes are 25%+ on your bonus, and down the road you may hope to do a Roth conversion pipeline and minimize taxes, it might make the most sense to dump as much of the bonus into your 401k as possible. (Unless I'm misunderstanding and you'd still somehow pay taxes on it?)

I am actually not sure how much I will be taxed on the bonus. How would I figure that out?

Proud Foot

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Re: Got my bonus-what would you do in my shoes?
« Reply #10 on: February 05, 2015, 12:55:18 PM »
Ask your HR department how they process the taxes for the bonus. I have heard of different ways from having the tax setup the same as a normal payroll to having it set up to withhold at set percentage for the bonus. 

sleepyguy

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Re: Got my bonus-what would you do in my shoes?
« Reply #11 on: February 05, 2015, 12:56:04 PM »
Unless they are doing a match on your 401k bonus deposit, that take out that 6.55% loan.

seattlecyclone

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Re: Got my bonus-what would you do in my shoes?
« Reply #12 on: February 05, 2015, 01:07:01 PM »
A bit more info:

I am working on the snowball method for my loans. The $1,500 loan started at $2,000, and I have been working on paying it off first. Last year I was just making minimum payments, but this year have made it my goal to eliminate all student loans.

As for the 401K, I am putting in 11% of my salary, and my company puts in 3% of my salary regardless of whether I contribute or not. After eliminating all student debts this year, I intend to max out the 401K next year.

Yes, I have an e-fund!

Thank you all for the responses. Glad to know that I was on the right track with paying off the loans first.

If you max out the 401(k) this year and next year, would you be able to get rid of your loans by the end of next year? If so, I might consider doing that in your shoes. Dragging out the loan repayment for another year will cost you a bit more interest, but you can't go back in time to make 401(k) contributions once this year is over. The long-term tax-deferred growth from extra 401(k) savings might be worth a bit of extra student loan interest.

GizmoTX

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Re: Got my bonus-what would you do in my shoes?
« Reply #13 on: February 05, 2015, 01:07:20 PM »
Tax withholding for a bonus is different than your regular pay, but at the end of the year is added into your total compensation on your W-2. Then your own tax situation determines how your total income will be taxed.

rocksinmyhead

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Re: Got my bonus-what would you do in my shoes?
« Reply #14 on: February 05, 2015, 01:18:13 PM »
Tax withholding for a bonus is different than your regular pay, but at the end of the year is added into your total compensation on your W-2. Then your own tax situation determines how your total income will be taxed.

this. I think it is common to withhold at 25%, but you will actually owe whatever your tax bracket is. mine is 28% and 2013 was my first year being in that bracket and also getting a bonus, and I had no idea what I was doing, so that was a bummer to be surprised with at tax time :)

I would do a little math to see how much you'd save in taxes by putting it into the 401K, vs. how much you'd save in interest by putting it to the highest-priority loan... how much are you currently throwing at the loan monthly?  how many months of interest would you save by putting an extra $XXXX at it? remember to modify $XXXX to account for taxes, I almost typed $1500 but then realized that wasn't right :)

RangerOne

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Re: Got my bonus-what would you do in my shoes?
« Reply #15 on: February 05, 2015, 01:57:57 PM »
 In the end the bonus is just income no matter how your employer decides to with hold. But yes some do use the simple method of just withholding a flat 25% for the fed income tax. Which could lead to surprises. They should explain how they do that if you ask payroll.

I find profit shares and bonuses a good time to front load your 401k a bit. By the time you get your bonus and raise you will be able to figure out exactly how much you need to deduct from each paycheck going forward to meet your 401k goal.

If you are shooting for maximum of 18k then you can sometimes put away the bulk of that with a profit share, then take higher paychecks throughout the year since your monthly contribution will be lower to get to 18k by year end.

As long as you are putting away the amount you want each year into the 401k, no more and no less. Then it is not terribly relevant when you put the money in, ie all at once or month after month, because come year end you will have the same amount of money left over to pay down your debts. Do it whichever way feels best.

You may want to check if any employer 401k match though is contingent upon monthly deposits, since that can get screwed up if max your 401k and don't have to pay for a few months.

ltt

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Re: Got my bonus-what would you do in my shoes?
« Reply #16 on: February 05, 2015, 01:59:52 PM »
When my husband gets his bonus, it's not necessarily calculated any different.  They still take out the percentage that goes toward his 401k.  In your case, 11% of $2,000 is $220.  You should then have about $1,780  My best guess is that you pay somewhere around 25% or so for federal, state, and social security.   So your $2,000 should net out somewhere in the neighborhood of $1,300 or less.  It's really hard to know without knowing all your tax info.

Ask your HR department if they could run some numbers for you.  Then I would pay the money toward the $1500 loan.

My husband's bonus is usually 1/2 of the gross amount by the time taxes and 401k is all said and done.

GregO

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Re: Got my bonus-what would you do in my shoes?
« Reply #17 on: February 05, 2015, 03:02:26 PM »
As for the 401K, I am putting in 11% of my salary, and my company puts in 3% of my salary regardless of whether I contribute or not. After eliminating all student debts this year, I intend to max out the 401K next year.
Maybe you have already done the tax calculations and looked at it, but are you saving enough in taxes to be contributing so much to your 401k before you pay off the 6.5% loans?  You are getting the loan interest deduction and 401k deduction, but is that enough of a tax deduction to offset the interest you are paying on the loans?  If you are a high earner and are making enough to do both, then more power to you.  But if you have to prioritize between the two, I' might be leaning towards focusing on the loans over contributing to my 401k.

Gone Fishing

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Re: Got my bonus-what would you do in my shoes?
« Reply #18 on: February 05, 2015, 03:31:36 PM »
What is your tax bracket?  Assuming your investment choices are resonable inside your 401(k), I would be inclined to go with 401(k) if you are in the 25% bracket and maybe even if you are in the 15% bracket.  You can always pay off debt, but you can never go back and fund you 401(k) after the opportunity has passed. 6.55% is high by today's standards but is by no means "Hair on Fire" high and is probably tax deductible, meaning you get a double tax benefit by funding the 401(k) instead. 

Start playing with Tax Caster to get an idea of how these things work together.

https://www.google.com/url?url=https://turbotax.intuit.com/tax-tools/calculators/taxcaster/&rct=j&frm=1&q=&esrc=s&sa=U&ei=7u3TVKyJFMuZNuq5gfAI&ved=0CBwQFjAA&usg=AFQjCNEcD91mHuJUFz2tWdYMBGBkUpKpIg

terran

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Re: Got my bonus-what would you do in my shoes?
« Reply #19 on: February 05, 2015, 05:53:34 PM »
Terran, thanks for this! I was just clued in yesterday to looking at the fees on my 401K, so the IRA is definitely something I am thinking about for this year. Would the costs of taxes just cancel out any benefit of this though?

If your AGI isn't more than $61k ($98k if married) then you can contribute to a traditional IRA which is tax deductible just like a 401k. You'll have to claim it on your taxes instead of it happening automatically through your paycheck, but otherwise there isn't any tax difference.

If your AGI is under $116k ($183k if married) then you can contribute to a Roth IRA, which you can't deduct from your income, but you also won't pay tax on when you withdraw. The general consensus seems to be that if you expect your marginal tax rate to be higher in retirement (either because you're in a higher bracket or because taxes have been raised for everyone) then the Roth is a good idea. If your tax rate is the same then it makes no difference.

cashstasherat23

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Re: Got my bonus-what would you do in my shoes?
« Reply #20 on: February 05, 2015, 06:26:23 PM »
Coming back to answer more!

My AGI is $45,000. I *think* this means that I am in the 25% tax bracket? As for the tax deduction for putting money into the 401K, how would I calculate that? (God, I can't believe how much I don't know. So sorry for all the questions!)

So Close: that calculator was very helpful, but I didn't see an option to put in 401K. I am working on my taxes for real, but waiting for some forms to arrive. I hope that when I do it for real, it is more accurate than the estimate, as right now it says I will owe $200 in federal taxes!

Also, the $2K bonus does not include any money going to the 401K unless I ask them to put some towards it.

Gone Fishing

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Re: Got my bonus-what would you do in my shoes?
« Reply #21 on: February 05, 2015, 07:03:58 PM »
Your 401(k) contributions will reduce your wages dollar for dollar, reducing your AGI.  Probably doesn't matter much now, but a traditional IRA contribution does not reduce your AGI.

seattlecyclone

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Re: Got my bonus-what would you do in my shoes?
« Reply #22 on: February 05, 2015, 07:08:02 PM »
Probably doesn't matter much now, but a traditional IRA contribution does not reduce your AGI.

False. If your income is low enough that you can deduct your traditional IRA contributions, you report that deduction on line 32 of your Form 1040. The deductions on lines 23-36 of your tax return are subtracted from your gross income to calculate your adjusted gross income (line 37 of Form 1040).

cashstasherat23

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Re: Got my bonus-what would you do in my shoes?
« Reply #23 on: February 05, 2015, 07:09:38 PM »
Your 401(k) contributions will reduce your wages dollar for dollar, reducing your AGI.  Probably doesn't matter much now, but a traditional IRA contribution does not reduce your AGI.

Ok-to clarify, this means that if I contributed $2K to my 401K last year, my AGI would actually be $43K?


Kind of related to this whole thread: can anyone recommend books or websites that would be helpful to delve further into all of this? I 110% appreciate all of the amazing information everyone has been providing, but feel bad for asking so many questions, and would love to learn more!
« Last Edit: February 05, 2015, 07:11:54 PM by cashstasherat23 »

terran

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Re: Got my bonus-what would you do in my shoes?
« Reply #24 on: February 05, 2015, 07:42:09 PM »
Ok-to clarify, this means that if I contributed $2K to my 401K last year, my AGI would actually be $43K?

That depends. Chances are your income listed on your W2 has already been reduced by the amount you've contributed to your 401k. If you're basing the $45k off your total compensation, then yeah you still need to take off the 401k contribution. 

Gone Fishing

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Re: Got my bonus-what would you do in my shoes?
« Reply #25 on: February 05, 2015, 08:06:23 PM »
Probably doesn't matter much now, but a traditional IRA contribution does not reduce your AGI.

False. If your income is low enough that you can deduct your traditional IRA contributions, you report that deduction on line 32 of your Form 1040. The deductions on lines 23-36 of your tax return are subtracted from your gross income to calculate your adjusted gross income (line 37 of Form 1040).

Thanks for the correction Seattle!