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Started By
Message
Advice re: YE Bonus
Posted on 11/30/22 at 12:45 pm
Posted on 11/30/22 at 12:45 pm
This end of year I will be receiving a sizable bonus, five figures, and am trying to get ideas for the best way to handle, specifically re: taxes. Our income taxes are generally unremarkable, i.e., nothing too complicated.
1. Just take the tax hit.:/
2. Put large amount into 401k as pre-tax, but won't we still pay taxes down the line when disbursement is made?
3. Cocaine.
Thanks for any guidance. Checking with some other sources but always open to more input.
1. Just take the tax hit.:/
2. Put large amount into 401k as pre-tax, but won't we still pay taxes down the line when disbursement is made?
3. Cocaine.
Thanks for any guidance. Checking with some other sources but always open to more input.
7
Posted on 11/30/22 at 12:52 pm to Havoc
Do you have an HSA?
If so, have you maxed out the contribution amount for this year?
If so, have you maxed out the contribution amount for this year?
Posted on 11/30/22 at 12:52 pm to Havoc
Depends on your situation. If you need the money just take the tax hit.
If not, use some to finish maxing your 401k this year then take the tax hit. Then if you haven’t maxed your Roth, do that.
With whatever is left after that:
If not, use some to finish maxing your 401k this year then take the tax hit. Then if you haven’t maxed your Roth, do that.
With whatever is left after that:
quote:
3. Cocaine.
Posted on 11/30/22 at 12:53 pm to Havoc
If you haven't maxed your 401k, yeah that's a good place to put it to reduce your tax burden for the year.
But understand that at this specific point in time that will be a net negative into your bank account vs not putting any in 401k.
But understand that at this specific point in time that will be a net negative into your bank account vs not putting any in 401k.
quote:Well yeah, there's no free lunch
but won't we still pay taxes down the line when disbursement is made?
Posted on 11/30/22 at 1:13 pm to Lightning
quote:
Do you have an HSA?
If so, have you maxed out the contribution amount for this year?
Yes. Don't know but will find out. Exactly the kind of input I was hoping for.
Posted on 11/30/22 at 1:18 pm to castorinho
So with the 401k route, we wouldn't have access to the money for many years and would still have to pay taxes on it then, so isn't it just postponing the taxes while not having the funds now? Am I overlooking a benefit of this option?
Posted on 11/30/22 at 1:35 pm to Havoc
Kanye giving out bonuses. I thought he was broke. Hip Dad Joke!
Posted on 11/30/22 at 1:46 pm to Havoc
One benefit would be the growth it experiences between now and when you finally access it.
Edit Also, when you access it you may be in a lower tax bracket than you are now due to lower income in retirement.? (Just a guess)
Edit Also, when you access it you may be in a lower tax bracket than you are now due to lower income in retirement.? (Just a guess)
This post was edited on 11/30/22 at 1:53 pm
Posted on 11/30/22 at 2:11 pm to ev247
Ah that makes sense.
Nice first post BTW.
Nice first post BTW.
Posted on 11/30/22 at 2:15 pm to Havoc
From an old 50 year old, if you don’t need the cash for life stuff, put it all in 401k and call it a day. You’ll pay taxes on it eventually but not until you are way way older and are forced to take RMD’s (required min distributions). Wish I would have done that a few times over the years.
Also, if you have an HSA account, max that out first as its a triple tax as a rage.
Also, if you have an HSA account, max that out first as its a triple tax as a rage.
Posted on 11/30/22 at 3:47 pm to Havoc
To back up, there are 2 ways to put money into a 401k. Pre-tax and post tax. If you are doing a roth (post-tax) 401k, you would be paying the taxes now, but experiencing tax free growth until you withdraw it (cannot do that until closer to reitrement age). Pre-tax would be placing the money into your 401k now, and not paying taxes on it until withdrawn at retirement. The benefit of this is it is reducing your taxable income for this year, but you will have to pay taxes on the principal and growth when you withdraw it during retirement. Depenign on how much you make, the roth (post-tax option) might not be availible. If you increase your 401k input, just be aware that you cannot access that money (without penalty) until the specified age.
Posted on 11/30/22 at 5:34 pm to Havoc
quote:
So with the 401k route, we wouldn't have access to the money for many years and would still have to pay taxes on it then, so isn't it just postponing the taxes while not having the funds now?
Yes, but amounts matter. You said that the bonus was five figures. Unless you withdrew that same amount (or more) in a given tax year in the future, your smaller withdrawal *could be* in a lower tax bracket than if you took the entire hit on the bonus now.
I don’t know anything about your financial situation, age, goals, etc. But maybe consider taking part now, putting a portion in the pre-tax 401K, a portion in a Roth 401K (if available to you) and of course, top off your HSA. Just food for thought.
Posted on 12/1/22 at 12:28 am to GeauxTigers777
Excellent. Thanks.
We could definitely use the funds now, some home projects we’ve been putting off and things coming up the next year or so. However, we were late getting on the 401k train, so making up some ground would be great.
Much to process. Kinda leaning towards eating the tax dick but just barely.
Thanks all. Cocaine time.
We could definitely use the funds now, some home projects we’ve been putting off and things coming up the next year or so. However, we were late getting on the 401k train, so making up some ground would be great.
Much to process. Kinda leaning towards eating the tax dick but just barely.
Thanks all. Cocaine time.
Posted on 12/1/22 at 12:46 am to Havoc
Max HSA, 401k, and Roth IRA in that order. Do what you want with the rest but leave some in your account for tax time.
Posted on 12/1/22 at 8:45 am to saderade
Also keep in mind, your company may very well tax your bonus at 40% or some stupid rate. I've worked at some places that tax it on the normal tax rate level, but the bank I work out now (despite numerous arguments from me) tax our bonuses at 40%, at least that's what ADP is set to do.
Do you might not get as much cash as you originally thought you would be getting. It may work to your advantage in April of 2024 in the form of a tax refund, but until then the government is making money off holding your money. Maybe a question for your HR.
Do you might not get as much cash as you originally thought you would be getting. It may work to your advantage in April of 2024 in the form of a tax refund, but until then the government is making money off holding your money. Maybe a question for your HR.
Posted on 12/1/22 at 8:57 am to Im4datigers
quote:
Also keep in mind, your company may very well tax your bonus at 40% or some stupid rate. I've worked at some places that tax it on the normal tax rate level, but the bank I work out now (despite numerous arguments from me) tax our bonuses at 40%, at least that's what ADP is set to do.
Most places use the % method to withhold bonuses. Unless your bonus was $1M or more, the taxes are withheld at 22%.
Posted on 12/1/22 at 9:04 am to Havoc
You joke, but #3 just hits different.
Posted on 12/1/22 at 3:30 pm to I Love Bama
quote:
Most places use the % method to withhold bonuses. Unless your bonus was $1M or more, the taxes are withheld at 22%.
Not my bank/ADP. I literally take home 40%-45% of my gross bonus every year after 401k contribution and taxes. It’s sick.
Posted on 12/1/22 at 4:18 pm to Im4datigers
Then they're either using the aggregate method, which is unlikely based on the other info you provided, or they're not doing it correctly. It's not an "ADP" thing, it's an IRS thing. There are specific guidelines businesses have to follow when withholding tax dollars related to bonuses.
Posted on 12/1/22 at 9:11 pm to Havoc
quote:
Am I overlooking a benefit of this option?
The time value of money growth on tax deferred money!
The general line of thinking is, once retired, when you lean on these funds, you will be at a lower tax bracket than, on avg, the tax bracket during your working years.
An idea, is to contribute to HSA (triple tax advantaged) and 401k (tax deferred) AND/OR Roth (after tax contribution (lower than tax deferred) but also grows tax free and can withdraw tax free during retirement)). Roth offers other benefits too but suffice it to say…
Your future self will thank your present self for investing part of your bonus this way.
I promise
Good luck
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