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Old 04-14-2010, 06:52 PM
 
13 posts, read 34,789 times
Reputation: 13
Post Need Help! 401k Bonus Deferral Election

So I've ran into an issue with an upcoming bonus check from my employer. In previous years, I have always elected to contribute 50% of my bonus in order to max out my 401k. This was done not only to meet the 401k max contribution limit for the year, but to also shield some of my bonus money from the large amount of taxes that are taken out.

As you know, the market has been extremely shaky over the past year. We've recently had a big comeback with the DJIA up somewhere near 60% from the financial-crisis panic lows. My question is, should I continue to contribute up to 50% of my bonus (until my 401k is maxed) from my bonus check or lower the deferred election to something like 15% like that which I have for my bi-weekly paycheck?

The reason I ask is because with the 15% from my bi-weekly paycheck, I am dollar cost averaging over the course of the year. With the recent run up in equities that we've seen, I'm kind of nervous to take $12k+ from my bonus and dump it into my 401k all at once. At the same time, I would be shielding that $12k+ from the extremely high tax rate for my bonus check.

Any suggestions?
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Old 04-14-2010, 07:10 PM
 
Location: Chicago
1,856 posts, read 2,753,581 times
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So in short you are worried that the market will have a correction and take a dip? If you figure out the answer to this let me know cuz I'd love to know too.
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Old 04-14-2010, 07:37 PM
 
13 posts, read 34,789 times
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So basically, I'm trying to figure out which would be better over the long-term:

1. Max out my 401k with $12k+ in a market that has had a huge run-up over the past year (ie. risk for loss after such a big increase - 'buying high') and shielding that $12k+ from a high (~40%) bonus tax.

or

2. Lower the bonus deferral election to 15%, pay more in taxes on the bonus money and continue to make contributions from my bi-weekly paycheck in order to dollar cost average and max out my 401k by the end of the year.
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Old 04-14-2010, 08:11 PM
 
4,184 posts, read 3,829,774 times
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Quote:
Originally Posted by phalgun View Post
So I've ran into an issue with an upcoming bonus check from my employer. In previous years, I have always elected to contribute 50% of my bonus in order to max out my 401k. This was done not only to meet the 401k max contribution limit for the year, but to also shield some of my bonus money from the large amount of taxes that are taken out.

As you know, the market has been extremely shaky over the past year. We've recently had a big comeback with the DJIA up somewhere near 60% from the financial-crisis panic lows. My question is, should I continue to contribute up to 50% of my bonus (until my 401k is maxed) from my bonus check or lower the deferred election to something like 15% like that which I have for my bi-weekly paycheck?

The reason I ask is because with the 15% from my bi-weekly paycheck, I am dollar cost averaging over the course of the year. With the recent run up in equities that we've seen, I'm kind of nervous to take $12k+ from my bonus and dump it into my 401k all at once. At the same time, I would be shielding that $12k+ from the extremely high tax rate for my bonus check.

Any suggestions?
Putting money into a 401K doesn't mean all that money should go into stocks. You can always put them in bonds or cash, still inside the 401k.
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Old 04-15-2010, 03:02 AM
 
20,798 posts, read 31,338,303 times
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That is hard question to answer without knowing what else you have in place, what your lifestyle is like, are you married, kids? Personally I don't like the idea of ONLY contributing to a 401K. I would be MUCH more concerned LONG RUN with the TAXES you will pay on that contribution when you take it out as a distribution in the end. People forget that when they are reducing your income now when you may be in a lower tax bracket now then when you retire.
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Old 04-15-2010, 05:45 AM
 
2,081 posts, read 1,925,813 times
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Quote:
Originally Posted by golfgal View Post
People forget that when they are reducing your income now when you may be in a lower tax bracket now then when you retire.
Sorry, but what exactly are you saying here?
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Old 04-15-2010, 10:28 AM
 
Location: Denver, CO
1,206 posts, read 2,666,507 times
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Wait, when you retire and take long term distributions shouldn't you be at a lower tax bracket than when you are at 34% when making lots of money while you are at the prime of your earning potential?
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Old 04-16-2010, 04:09 AM
 
20,798 posts, read 31,338,303 times
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Quote:
Originally Posted by MeInDenudinFL View Post
Sorry, but what exactly are you saying here?
I am saying that if you have a couple kids and a mortgage you are probably in a lower tax bracket now then you will be when you start taking money out of your retirement accounts with no kids or mortgage to deduct.

Quote:
Originally Posted by Moonwalkr View Post
Wait, when you retire and take long term distributions shouldn't you be at a lower tax bracket than when you are at 34% when making lots of money while you are at the prime of your earning potential?
Maybe yes, maybe no. See the above example. I know we are in a MUCH lower tax bracket now with the business deductions, kids, mortgage, etc. that we take then we will be even 2 years from now as our kids start moving out.
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Old 04-16-2010, 06:20 AM
 
2,081 posts, read 1,925,813 times
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Quote:
Originally Posted by golfgal View Post
I am saying that if you have a couple kids and a mortgage you are probably in a lower tax bracket now then you will be when you start taking money out of your retirement accounts with no kids or mortgage to deduct.
That may be true for somebody that starts at the bottom of the chain and work their way up in the ladder after decades and earn high salary but I doubt that is the case for the majority of people. The way I see it the majority of people will have a much lower tax bracket upon retirement. Even those generic question how much do you need in retirement assume only a fraction of pre-retirment income (granted that is the last income bracket one sees) but still. All the researches show that the majority of people do not have "sufficient" fund saved up. So, I wonder how do they get into a higher tax bracket upon retirement. I know I won't.
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Old 04-16-2010, 08:31 AM
 
Location: The Pacific NW.
739 posts, read 1,065,263 times
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Keep in mind there's a good chance that tax rates in general will be higher in the future than they are now. So even if you think you'll be in a lower bracket in retirement, the rate could be higher than your rate today.
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