Author Topic: Need Advice: Bonus Came Early & Threw off my 401k Calculations  (Read 4506 times)

FruGal

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Need Advice: Bonus Came Early & Threw off my 401k Calculations
« on: December 29, 2015, 03:28:12 PM »
Here are the facts:
- I've contributed just enough of my 401k to put me (barely) within the 15% tax bracket (I've accounted for the personal exemption and deductions).
- I am about $10,000 short of maxing out my 401k for the year.
- My $5,000 end of year bonus was deposited on the 25th of December (last year when it was deposited in January).
- So far in 2015, I've contributed $2000 to a Roth IRA (and $15,000 to personal accounts).

I've read differing (and confusing) information about whether or not I can make 401k contributions through my employer after the new year. Does anyone know if this can be done/the proper course of action to make it happen? If not, what's the advisable way to invest my bonus while limiting my tax liability? Thanks!

WildJager

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Re: Need Advice: Bonus Came Early & Threw off my 401k Calculations
« Reply #1 on: December 29, 2015, 03:55:16 PM »
You could start a regular IRA and deposit $3000 into that.  I have both now too.  Started with a Roth, and transitioned to a traditional IRA for similar tax bracket reasons/ being able to do a roth conversion ladder down the road.

According to the following link, it looks like 401k wage deferrals only apply to calendar year, unlike IRAs which are fiscal year based.

http://www.investopedia.com/ask/answers/06/salarydeferral401(k).asp

Gin1984

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Re: Need Advice: Bonus Came Early & Threw off my 401k Calculations
« Reply #2 on: December 29, 2015, 04:30:31 PM »
You might be able to throw everything in your last paycheck into 401k, if you have one.  Or you could talk to payroll about returning the cash to them and having them max your 401k for you.  There may be one decent payroll person who can help, ask.

FruGal

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Re: Need Advice: Bonus Came Early & Threw off my 401k Calculations
« Reply #3 on: December 29, 2015, 06:39:40 PM »
You might be able to throw everything in your last paycheck into 401k, if you have one.  Or you could talk to payroll about returning the cash to them and having them max your 401k for you.  There may be one decent payroll person who can help, ask.

My 401k is through my employer and our main payroll person is out of the office until January 4th... I'll send them an email, but it'll probably earn me some side-eye for a while. :/ Thanks for the tip!

v8rx7guy

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Re: Need Advice: Bonus Came Early & Threw off my 401k Calculations
« Reply #4 on: December 29, 2015, 06:44:13 PM »
Here are the facts:
- I've contributed just enough of my 401k to put me (barely) within the 15% tax bracket (I've accounted for the personal exemption and deductions).
- I am about $10,000 short of maxing out my 401k for the year.
- My $5,000 end of year bonus was deposited on the 25th of December (last year when it was deposited in January).
- So far in 2015, I've contributed $2000 to a Roth IRA (and $15,000 to personal accounts).

I've read differing (and confusing) information about whether or not I can make 401k contributions through my employer after the new year. Does anyone know if this can be done/the proper course of action to make it happen? If not, what's the advisable way to invest my bonus while limiting my tax liability? Thanks!

I just want to make sure, since it's a common misconception about taxes, that going from the 15% tax bracket to the 25% bracket does not mean that all of your income will be taxed @ 25%... it will only be the amount over the break in brackets ($34,450 or $74,900 depending on if you are individually or jointly)

With that being said, if you are still concerned about this, I would probably set up an IRA and deposit what you need into that.
« Last Edit: December 29, 2015, 06:46:37 PM by v8rx7guy »

MrFrugalChicago

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Re: Need Advice: Bonus Came Early & Threw off my 401k Calculations
« Reply #5 on: December 30, 2015, 10:14:07 AM »

I just want to make sure, since it's a common misconception about taxes, that going from the 15% tax bracket to the 25% bracket does not mean that all of your income will be taxed @ 25%... it will only be the amount over the break in brackets ($34,450 or $74,900 depending on if you are individually or jointly)


This. Been told by trashy relatives "Whats the point of making more money, I will just pay more taxes and end up with the same paycheck".  (Then why do some people have mansions and you live in a trailer?)

Now some things can go poof very fast by too much money, for example being able to contribute to roth vs not phases out very very quickly if you get close to the limit.. However tax rate is sane in that tax brackets only apply to income above that amount.

dandarc

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Re: Need Advice: Bonus Came Early & Threw off my 401k Calculations
« Reply #6 on: December 30, 2015, 10:19:49 AM »
You can also recharacterize your Roth contributions to traditional if that would help your situation.  Up to your tax-filing deadline.

FruGal

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Re: Need Advice: Bonus Came Early & Threw off my 401k Calculations
« Reply #7 on: December 30, 2015, 12:06:57 PM »

I just want to make sure, since it's a common misconception about taxes, that going from the 15% tax bracket to the 25% bracket does not mean that all of your income will be taxed @ 25%... it will only be the amount over the break in brackets ($34,450 or $74,900 depending on if you are individually or jointly)

With that being said, if you are still concerned about this, I would probably set up an IRA and deposit what you need into that.

Yes, I'm aware. I calculated my 401k contributions so I would just barely not have any income taxed at 25%... which means virtually all of my bonus will be taxed at 25%.

FruGal

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Re: Need Advice: Bonus Came Early & Threw off my 401k Calculations
« Reply #8 on: December 30, 2015, 12:08:50 PM »
You can also recharacterize your Roth contributions to traditional if that would help your situation.  Up to your tax-filing deadline.

I was not aware of this! Thanks for the tip!

FruGal

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Re: Need Advice: Bonus Came Early & Threw off my 401k Calculations
« Reply #9 on: December 30, 2015, 02:57:39 PM »
You can also recharacterize your Roth contributions to traditional if that would help your situation.  Up to your tax-filing deadline.

I was not aware of this! Thanks for the tip!

I just found out the financial institution I have my Roth IRA in (Wealthfront) does not support the conversion of Roth IRA. From their website "...nor do we support moving Roth IRA assets to a traditional IRA account." I thought that was my answer. Bummer.

FruGal

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Re: Need Advice: Bonus Came Early & Threw off my 401k Calculations
« Reply #10 on: December 30, 2015, 03:29:30 PM »
You might be able to throw everything in your last paycheck into 401k, if you have one.  Or you could talk to payroll about returning the cash to them and having them max your 401k for you.  There may be one decent payroll person who can help, ask.

My 401k is through my employer and our main payroll person is out of the office until January 4th... I'll send them an email, but it'll probably earn me some side-eye for a while. :/ Thanks for the tip!

Just heard back that there's "nothing they can do." I guess that option's dead. 

dandarc

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Re: Need Advice: Bonus Came Early & Threw off my 401k Calculations
« Reply #11 on: December 30, 2015, 03:50:12 PM »
You might be able to throw everything in your last paycheck into 401k, if you have one.  Or you could talk to payroll about returning the cash to them and having them max your 401k for you.  There may be one decent payroll person who can help, ask.

My 401k is through my employer and our main payroll person is out of the office until January 4th... I'll send them an email, but it'll probably earn me some side-eye for a while. :/ Thanks for the tip!

Just heard back that there's "nothing they can do." I guess that option's dead.
You want to defer $5000 to off-set your bonus right?

Put $3K into a tIRA, then recharacterize the $2K you already put into a Roth IRA.  Done.

FruGal

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Re: Need Advice: Bonus Came Early & Threw off my 401k Calculations
« Reply #12 on: December 30, 2015, 04:50:19 PM »
You might be able to throw everything in your last paycheck into 401k, if you have one.  Or you could talk to payroll about returning the cash to them and having them max your 401k for you.  There may be one decent payroll person who can help, ask.

My 401k is through my employer and our main payroll person is out of the office until January 4th... I'll send them an email, but it'll probably earn me some side-eye for a while. :/ Thanks for the tip!

Just heard back that there's "nothing they can do." I guess that option's dead.
You want to defer $5000 to off-set your bonus right?

Put $3K into a tIRA, then recharacterize the $2K you already put into a Roth IRA.  Done.

The financial institution I have my Roth IRA in (Wealthfront) does not support the conversion of Roth IRA. From their website "...nor do we support moving Roth IRA assets to a traditional IRA account." So, I can put $3.5k in a traditional IRA. I guess I can take being taxed 25% on the other $1.5k. Ah well, the best laid plans...

Frs1661

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Re: Need Advice: Bonus Came Early & Threw off my 401k Calculations
« Reply #13 on: December 30, 2015, 05:11:15 PM »
Perhaps if you rolled it over to vanguard they would do the recharacterization?

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Allen

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Re: Need Advice: Bonus Came Early & Threw off my 401k Calculations
« Reply #14 on: December 30, 2015, 11:13:32 PM »
You might be able to throw everything in your last paycheck into 401k, if you have one.  Or you could talk to payroll about returning the cash to them and having them max your 401k for you.  There may be one decent payroll person who can help, ask.

My 401k is through my employer and our main payroll person is out of the office until January 4th... I'll send them an email, but it'll probably earn me some side-eye for a while. :/ Thanks for the tip!

Just heard back that there's "nothing they can do." I guess that option's dead.
You want to defer $5000 to off-set your bonus right?

Put $3K into a tIRA, then recharacterize the $2K you already put into a Roth IRA.  Done.

The financial institution I have my Roth IRA in (Wealthfront) does not support the conversion of Roth IRA. From their website "...nor do we support moving Roth IRA assets to a traditional IRA account." So, I can put $3.5k in a traditional IRA. I guess I can take being taxed 25% on the other $1.5k. Ah well, the best laid plans...

A conversion and a recharacterization are different. Most should support the second option. Get a second opinion!

hoppy08520

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Re: Need Advice: Bonus Came Early & Threw off my 401k Calculations
« Reply #15 on: January 02, 2016, 06:28:34 PM »
It's too late for tax year 2015, but if you're planning something similar for 2016, see if you can get your contributions amounts to be a fixed amount rather than a percentage. With a fixed amount to contribute per payroll, you can be sure you will contribute exactly what you intend. Some 401(k) plans allow this, and some don't, but it might be worth checking.

Scandium

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Re: Need Advice: Bonus Came Early & Threw off my 401k Calculations
« Reply #16 on: January 04, 2016, 09:10:27 AM »
Separately from your issue, I don't quite see the point of leaving $10,000 of 401k space on the table (i.e. $1,500 in tax savings) when you contribute $15k (of taxed money) to another account. What's the draw of just getting just below the relatively meaningless 25% bracket?

Bumperpuff

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Re: Need Advice: Bonus Came Early & Threw off my 401k Calculations
« Reply #17 on: December 29, 2016, 06:02:23 PM »
Separately from your issue, I don't quite see the point of leaving $10,000 of 401k space on the table (i.e. $1,500 in tax savings) when you contribute $15k (of taxed money) to another account. What's the draw of just getting just below the relatively meaningless 25% bracket?

I stay below (pretty well below) the 25% bracket because it allows me to avoid long term capital gains and taxes on qualified dividends.  I'm also thinking that I might make use of the Roth ladder post FIRE, so I'm not too worried about being a bit light in my taxable portfolio.