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Rev1897 
LSU Fan
NOLA
Member since Dec 2008
441 posts
| Bonus at the end of year (Posted on 11/30/12 at 5:14 pm)
Anyone roll their bonus into a 401k so as to avoid paying taxes on it now?
Looking at a hefty one and I'm thinking about the best ways to invest and plan with the money. I'm pretty young and my debt is all at good interest rates...
What would you do with a five-figure bonus?
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Llama
Member since Nov 2012
12 posts
| re: Bonus at the end of year (Posted on 11/30/12 at 5:19 pm to Rev1897)
401k contributions have caps. Does your employer offer deferred compensation plan?
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Rev1897
LSU Fan
NOLA
Member since Dec 2008
441 posts
| re: Bonus at the end of year (Posted on 11/30/12 at 5:44 pm to Llama)
What's the cap? Not sure if they do.
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yellowfin 
Illinois Fan
Paige is Pretty
Member since May 2006
51771 posts
 Online
| re: Bonus at the end of year (Posted on 11/30/12 at 5:58 pm to Rev1897)
cap is about 17k and that includes what you've already put in during the year
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Zilla
LSU Fan
Friendswood, TX
Member since Jul 2005
9548 posts
| re: Bonus at the end of year (Posted on 11/30/12 at 9:47 pm to Rev1897)
I plan on funding my roth and 529 plans with my 10k in Jan.
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Llama
Member since Nov 2012
12 posts
| re: Bonus at the end of year (Posted on 11/30/12 at 10:15 pm to Zilla)
Its never a bad idea to set aside 4-6 months of living expenses in savings. Roth is a great idea, if eligible to contribute... Still wont solve his tax dilemma this year, but would pay off down the road in my opinion.
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Rev1897
LSU Fan
NOLA
Member since Dec 2008
441 posts
| re: Bonus at the end of year (Posted on 12/1/12 at 8:08 am to Llama)
Yea, I'm currently reviewing the Roth v traditional IRa. Looks like Roth may be better for me
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Blakely Bimbo 
Alabama Fan
Member since Dec 2010
753 posts
| re: Bonus at the end of year (Posted on 12/1/12 at 9:24 am to Rev1897)
If you had asked me 5 years ago, I would have said that any fiddling with deferred accounts would be impossible. Not saying TPTB are going to take the accounts, but some rules changes will come.
As the gov needs more and more money, then anything is possible and one cannot put all of one's eggs in the same basket...
quote:
One of the earliest fears about tax-favored savings accounts like IRAs and 401(k) plans was that when this pool of savings grew large enough Congress would not be able to resist tapping it to help solve the nation’s debt problems. We’re about to find out if those fears—persistent for decades—have been justified.
Time
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Rev1897
LSU Fan
NOLA
Member since Dec 2008
441 posts
| re: Bonus at the end of year (Posted on 12/1/12 at 9:28 am to Blakely Bimbo)
Well that's scary. I guess that makes me lean toward a traditional IRA then.
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BestBanker 
New Orleans Saints Fan
stuck in a moment
Member since Nov 2011
1634 posts
| re: Bonus at the end of year (Posted on 12/1/12 at 10:28 am to Rev1897)
Depending on your/my current income and tax deductions available, my answer could be take it now, pay the income tax, and put it to work earning tax-free income or unearned income with added depreciation opportunities. I am never a fan of delaying my payment of income tax to an unknown future of income tax rates.
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Tmacelroy12
LSU Fan
Houston
Member since Aug 2012
5489 posts
| re: Bonus at the end of year (Posted on 12/1/12 at 10:50 am to BestBanker)
Roth is better if you are in a lower tax-bracket and expect to have a lower tax rate now than in the future. I'm sure you know that by now.
I'm fresh out of school, and I'm putting 10% a paycheck aside (7% into Roth and 3% into a regular IRA).
It would be really hard for you to shelter that 10k from taxes, or the IRS will come swoopin down on you
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Siderophore
LSU Fan
Member since Nov 2010
3334 posts
| re: Bonus at the end of year (Posted on 12/2/12 at 9:21 am to Tmacelroy12)
quote:
Roth is better if you are in a lower tax-bracket and expect to have a lower tax rate now than in the future. I'm sure you know that by now.
I've always heard that, but I don't think it's true.
Oh, it's true if you are close to needing to pull money from it, but not in general.
But even at the highest tax bracket, you'll recoup what was lost within 10 years, assuming inflation and the most conservative growth of stock.
I haven't sat down and did the comparison of the opportunity cost of growth vs having to pay taxes on the growth, but it seems to be that for your 20s and 30s, that maxim does not apply. Put every cent that you can in a Roth, period. Focus more on traditional IRA's later in life, and draw from them first in retirement (after you have drawn down taxable investments) to further increase the advantages of a Roth.
This post was edited on 12/2 at 11:50 am
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jso0003 
Auburn Fan
Birmingham/Atlanta
Member since Jun 2009
4456 posts
| re: Bonus at the end of year (Posted on 12/2/12 at 11:23 am to Siderophore)
Every young person should be doing their absolute best to max out a Roth every year.
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Rev1897
LSU Fan
NOLA
Member since Dec 2008
441 posts
| re: Bonus at the end of year (Posted on 12/2/12 at 2:18 pm to jso0003)
quote:
Every young person should be doing their absolute best to max out a Roth every year.
why do you say this? It's only $5,000 per person, right?
I am already maxing out my 401k and have a significant savings/equities account.
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Siderophore
LSU Fan
Member since Nov 2010
3334 posts
| re: Bonus at the end of year (Posted on 12/2/12 at 3:23 pm to Rev1897)
Because of the massive tax advantages associated with a Roth if you can give it time to compound interest significantly.
I have my Roth as my primary retirement vehicle. I put the max for employer matching in my 401k, but I plan on rolling it over into my Roth when I move.
Also, a Roth can double as an emergency fund by allowing you to withdraw contributions no questions asked and penalty free.
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tigeraddict
LSU Fan
Baton Rouge
Member since Mar 2007
4435 posts
| re: Bonus at the end of year (Posted on 12/3/12 at 11:42 am to Rev1897)
quote:
why do you say this? It's only $5,000 per person, right?
I am already maxing out my 401k and have a significant savings/equities account.
rule #1 - make sure you are contributing up to what your employer matches with your 401K. You will not make a better initial ROI that having your employer match.
rule #2 - if you are young enough to see the ROTH growth then contribute up to the max of ROTH limits
rule #3 - any more retirement money you have to invest, back into a 401k or traditional IRA
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