Author Topic: Frontloading and backloading  (Read 4546 times)

Daisy

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Frontloading and backloading
« on: November 05, 2014, 07:34:54 PM »
I am proposing to frontload your 401k early in the year and backload your federal income taxes later in the year.

This way you can smooth out your paychecks throughout the year, get your investment money into the markets as soon as possible, and pay Uncle Sam the latest possible.

I recently realized I was going to have way more itemized deductions this year than expected so I went to an income tax estimator and realized I had already paid enough taxes for the year. So I set my number of exemptions on my W-4 to 29 which results in no income taxes being deducted from my paycheck.

Then, I remembered a conversation I had with a co-worker where we were discussing frontloading our 401k's as the Mad FIentist has suggested. He said he didn't like that idea because he'd rather see smooth paychecks throughout the year for cash flow purposes. I thought that was a good reason and so wasn't sure if I'd be frontloading since I have some higher expenses early on next year.

But now that I did this end of year finagling with my W-4, the thought arose that I could frontload my 401k during the first 6 months of the year, keep the exemptions at 29 and pay no income tax, then once the frontloading is done, change my exemptions to a number that reflects what I have to pay in the next 6 months to hit the proper income tax goal. The goal is always to pay and owe no money or refund when I file my taxes....hit it just right. There are calculators online where you can figure out the proper number of exemptions in the remaining paychecks of the year to pay the proper amount of tax.

One downside is if I lose my job halfway into the year. But then I realized I'd have made 50% of my salary and have put so much into the 401k that my taxable income would not be much....so I wouldn't owe too much on taxes anyways.

What say you?
« Last Edit: November 05, 2014, 07:39:06 PM by Daisy »

Daisy

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Re: Frontloading and backloading
« Reply #1 on: November 05, 2014, 10:39:03 PM »
If you lose your job halfway through the year after using this scheme, keep in mind you may have to pay "quarterly" estimated tax payments for the remainder of the year, unless you meet the conditions not to have to do so.

The other thing to consider is that claiming a high number of allowances may subject you to an IRS audit, but there is no specific threshold that does so. However, some states have specific thresholds for an audit (e.g. it's 10 in California). I do fiddle with the allowances myself but I don't go above 9 to avoid the California audit.

Yes I figured if I lost my job mid year that I'd have to make advanced tax payments so as not to get hit with an underpayment penalty come tax time.

Would you be subject to an audit if by the end of the year you've paid up all of your taxes? I didn't realize they could have mid-year audits when you haven't even submitted your tax returns for that year. I'm in Florida and don't know what our rules are.

Daisy

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Re: Frontloading and backloading
« Reply #2 on: November 05, 2014, 11:23:05 PM »
Interesting, Cathy. Although I am not self-employed nor own my own business. I'm usually not a target for audits. I'm just a boring salaried employee with regular itemized deductions - nothing fancy.

Maybe a way around it is to pay regular taxes on the first 2-3 paychecks, then go into major frontloading mode. That way it doesn't show you paying 0 taxes for the year during a mid-year audit.

Cheddar Stacker

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Re: Frontloading and backloading
« Reply #3 on: November 06, 2014, 12:34:08 PM »
Daisy, I think it's a great idea. Even if an audit occurred, the worst thing I believe could happen is you might be charged a bit of interest and penalty for paying late. However, you've frontloaded your 401k so any loss from those penalties would theoretically be more than offset by the gains made in your 401k.

Alternatively if you are deathly afraid of the IRS or don't want to send up any red flags, just set your exemptions at 8 or something like that. Reduce your taxes to an extremely low level for now, and make up any difference later. I've been thinking about doing something similar for a while now but have yet to pull the trigger. I have the (possibly somewhat)unique advantage of getting a bonus on the last day of the year, knowing exactly the amount of tax I will owe nearly to the dollar, and being able to set my withholdings to any specific number I need to pay the tax in. Seems worth it for me.

Thanks for posting this, I hope others find it useful as well.

TLV

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Re: Frontloading and backloading
« Reply #4 on: November 07, 2014, 12:36:39 PM »
I do this to some extent. My employer only allows declaring up to 10 exemptions on the W-4 without providing documentation, so that's what I start the year at. In September (when raises/bonuses are given) I set it back to 0 and add extra withholding to make up for it.

For the 401k, I don't go all out - my employer allows 75% contributions and 20k of after-tax space. If I were to set it to the max at the start of the year, I would have to build up a large cash reserve for several months beforehand (negating the benefit of front-loading) to last until the 401k was full. Also, if I did just pre-tax until maxed, followed by just post-tax, then during the post-tax portion I wouldn't be able to fully contribute to the ESPP (15%, which is less than is left after taxes). Starting next year I have it set at 30% pre-tax and 30% post-tax and I don't plan to adjust it.

Daisy

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Re: Frontloading and backloading
« Reply #5 on: November 09, 2014, 12:57:52 PM »
I do this to some extent. My employer only allows declaring up to 10 exemptions on the W-4 without providing documentation, so that's what I start the year at. In September (when raises/bonuses are given) I set it back to 0 and add extra withholding to make up for it.

For the 401k, I don't go all out - my employer allows 75% contributions and 20k of after-tax space. If I were to set it to the max at the start of the year, I would have to build up a large cash reserve for several months beforehand (negating the benefit of front-loading) to last until the 401k was full. Also, if I did just pre-tax until maxed, followed by just post-tax, then during the post-tax portion I wouldn't be able to fully contribute to the ESPP (15%, which is less than is left after taxes). Starting next year I have it set at 30% pre-tax and 30% post-tax and I don't plan to adjust it.

Yeah, the dilemma with frontloading is having tiny paychecks at the beginning of the year. So that's why, if you can, tax backloading could be a way to smooth it out.

I do ESPP as well and just started my post-tax 20% contribution to the 401k. But since I've already loaded up my pre-tax 401k for the year, it won't hurt too much to add the after-tax. Come January time, I will have to see how tiny my paycheck will be and if it's worth it. But I am minimizing taxes up front, so I think it will be OK.

learnedbehavior

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Re: Frontloading and backloading
« Reply #6 on: December 19, 2018, 02:47:43 PM »
I'm not a lawyer but I would not recommend intentionally providing false information on your W-4 for this purpose because it is probably a crime. From the Penalties section of Chapter 4 in https://www.irs.gov/pub/irs-pdf/p17.pdf:

Quote
Penalties
You may have to pay a penalty of $500 if both of the following apply.

* You make statements or claim withholding allowances on your Form W-4 that reduce the amount of tax withheld.
* You have no reasonable basis for those statements or allowances at the time you prepare your Form W-4.

There is also a criminal penalty for willfully supplying false or fraudulent information on your Form W-4 or for willfully failing to supply information that would increase the amount withheld. The penalty upon conviction can be either a fine of up to $1,000 or imprisonment for up to 1 year, or both.
These penalties will apply if you deliberately and knowingly falsify your Form W-4 in an attempt to reduce or eliminate the proper withholding of taxes. A simple error or an honest mistake won't result in one of these penalties.

For example, a person who has tried to figure the number of withholding allowances correctly, but claims seven when the proper number is six, won't be charged a W-4 penalty.

2Birds1Stone

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Re: Frontloading and backloading
« Reply #7 on: December 19, 2018, 03:36:33 PM »
You dug up a post from 4 years ago to make your first post?

learnedbehavior

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Re: Frontloading and backloading
« Reply #8 on: December 19, 2018, 04:23:02 PM »
You dug up a post from 4 years ago to make your first post?

Guess so! Happy to be here.


2Birds1Stone

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Re: Frontloading and backloading
« Reply #9 on: December 19, 2018, 04:36:58 PM »
Fuck, I love the bear.

the_fixer

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Re: Frontloading and backloading
« Reply #10 on: December 19, 2018, 04:44:44 PM »
I guess it would depend on if you are trying to do pre-tax or the entire thing of pre and after tax.

My work will only allow us to contribute 75% so I maxed my pre-tax 401k this year in 7 bi weekly pay periods and very little tax was taken out from State and Fed so while you are in the pre-tax I am not sure it would be worth adjusting the withholding.


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