Bonus and 401k question

[billchrz]

So I'm getting a bonus of approximately 30k from work this year and am trying to figure out the best way to get the "most bang for my buck" out of it in terms of less tax taken out.

So the way I see it, I have 3 choices:

1) Raise my 401k contribution temporarily to 50% and max out my 401k for 2012 early in the year.
2) Leave the 401k contribution the same (15%) and max out of 401k sometime in October/November but have more money in savings.
3) Lower my 401k contribution temporarily to 0% and put everything in savings, maxing out my 401k at the end of the year.

Here is my situation. Currently making 101k, raising to 108k in March. I currently contribute 15% into my 401k and adjust as the year progresses to ensure I max out. We have a fully funded emergency fund but are trying to save for a down payment on a new house as the neighborhood was fine for my wife and I but not someplace that we want to raise our kids. We are not in a huge rush and have a few years before this happens because we are about 30k under water (not from a bad mortgage) and our DD is only 16 months old. The current mortgage is affordable at 27% of income and is a standard 30 yr fixed at 5.3% (I wish I could refi this).

So based on the above, can someone help out with the numbers on all 3 options? What would the take home look like for all 3 options? Any advice?

Thanks in advance!

[BuckyBadger]

Are you maxing out Roth's, as well?

Savings accounts are paying less than 1% in interest, usually, so the difference between your three options are fairly minimal... I suppose you could max out your 401k early and get another few months out of it, but honestly it's not going to make very much different, if any at all, in the long run.

Personally I'd just keep the 401k on autopilot and do something else with the $30k. If you need an efund, by all means keep it in a savings account. If you don't need it, invest it. You may be able to put a total of $20k into Roths right now if you can contribute for 2011 and 2012 for both you and your wife.

If you've already maxed out all your tax advantaged space, open a taxable account, or just keep it in savings for short term goals.

FYI you should check with HR -- most places automatically cut off your 401k contributions right at the limit, so you might find it easier to ever so slightly overestimate your 401k contribution at the beginning of the year. If you plan it right, you'll take just enough out every month to max out somewhere between your 25 and 26th contribution and end up with a couple hundred extra dollars in your 26th paycheck. Easier than trying to tweak tweak tweak without going over, since most companies don't allow you to go over automatically, anyway.

[MonkeyMama]

I can't say it matters much either way.

Maxing out 401k right now is a good hedge in case something happens to your job. That is the only reason I could see to max it out early. Matching formula might be better to stay the course on 401k contributions (sometimes the match is percent of monthly contribution? So favors regular monthly contributions for whole year?)

[billchrz]

Thanks all. My company will continue to contribute the match even if we max out early.

I have a fully funded efund, the money will be saved for the down payment on our next house.

[Hector]

I don't see a point of raising 401k contribution to max it out earlier. I would keep contributing fix amount every paycheck to max it out by the end of the year. I would go with your option 2.

If I am not in hurry for down payment, I would do following assuming you are in 25% or higher combined tax bracket:
1. max out wife's regular IRA
2. max out your 401k
3. max out HSAs
4. max out your Roth IRA


If you wife is working and is eligible for 401k, I would
1. max out both 401ks
2. max out HSAs
3. max out ROTH IRAs

[Slug]

I agree you should just leave the 401k as is. DCA in throughout the year. Congrats on the bonus I wish I had!

[kv968]

I'm not sure if this works out in the long run (i.e. when you file taxes at the end of the year), but when we're due to get a bonus at work some of my co-workers go to the online payroll system and raise their dependents to 9 or something like that. They take less taxes so you if you're over taxed you won't have to wait until tax time to get it back. I don't even know if we're allowed to do it anymore or if it even works overall but that might be an option. Of course you'd have to go back in and change the dependents back to whatever it was afterwards otherwise you'll get killed in taxes at the end of the year.

MoneyMama, any thoughts on this?