401k contributions from annual bonus

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njdealguy
Posts: 190
Joined: Wed Jul 26, 2017 8:15 am

401k contributions from annual bonus

Post by njdealguy »

Hi my company matches the first 5% across all eligible compensation (salary + bonus) for 401k contributions. I just recently received a 50k bonus last week and opted to not have any 401k contribution deducted from the bonus since I prefer to maximize the contribution annual limit by contributing equal amounts in each pay period from the regular salary (for sake of dollar cost averaging) so there was no company contribution for the bonus.

I've emailed my company HR asking about this havent been able to get an answer yet as to whether the additional money will be made up on later regular salary contributions this year. Just anxious if anyone had a similar situation and hopefully I didnt make a big blunder to lose out on $2500 worth of additional company 401k contributions!
sailaway
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Re: 401k contributions from annual bonus

Post by sailaway »

If you are making the maximum contribution, won't you still get the maximum match?
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njdealguy
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Joined: Wed Jul 26, 2017 8:15 am

Re: 401k contributions from annual bonus

Post by njdealguy »

sailaway wrote: Tue May 11, 2021 11:10 am If you are making the maximum contribution, won't you still get the maximum match?
I contribute 10% of my base salary of 200k divided by each pay period, to get to the maximum contribution by end of year. If the company match is only given when I actually contribute at least 5% for a given paycheck, that means based on my making contributions only for base salary paychecks my total company match for the year would be $10,000

If 5% were to be given including salary and bonus, I was supposed to be receiving $12,500 for the year. Worried due to this blunder have lost out on the extra $2500 this way.
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RickBoglehead
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Re: 401k contributions from annual bonus

Post by RickBoglehead »

You should be able to see if the company is matching each pay period, or on some other interval. If they match each pay period, then yes, you likely just gave up $2,500.

To me it's clear - you gave up putting $2,500 of your pre-tax pay in your 401(k), and you lost $2,500 of company match.

I missed that you were hitting $19,500. I thought you were attempting to divide it evenly for DCA and do the 5% necessary for the company match. I agree that if you accelerated it by doing the 401(k), you would likely lose company match.
Last edited by RickBoglehead on Tue May 11, 2021 12:00 pm, edited 1 time in total.
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Hyperchicken
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Re: 401k contributions from annual bonus

Post by Hyperchicken »

Does your 401(k) plan have true-up match? If it does, you will (or may) get your missed employer contribution sometime early next year.

There should be plan description document available somewhere. If HR do not have a direct answer, they may at least be able to point you to this document.
humblecoder
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Re: 401k contributions from annual bonus

Post by humblecoder »

njdealguy wrote: Tue May 11, 2021 11:20 am
sailaway wrote: Tue May 11, 2021 11:10 am If you are making the maximum contribution, won't you still get the maximum match?
I contribute 10% of my base salary of 200k divided by each pay period, to get to the maximum contribution by end of year. If the company match is only given when I actually contribute at least 5% for a given paycheck, that means based on my making contributions only for base salary paychecks my total company match for the year would be $10,000

If 5% were to be given including salary and bonus, I was supposed to be receiving $12,500 for the year. Worried due to this blunder have lost out on the extra $2500 this way.
EDIT: I think I see the flaw in my logic. If you were to lower your contribution to 5%, you might be able to capture additional matching dollars. If you were to lower your contribution to 5% in the earlier pay periods, you can increase your match, if I am understanding your plan correctly.

Pay #1, $20K salary, $1K contribution, $1K match
Pay #2, $20K salary, $1K contribution, $1K match
BONUS, $50K bonus, $2.5K contribution, $2.5K match
Pay #3, $20K salary, $1K contribution, $1K match
Pay #4, $20K salary, $1K contribution, $1K match
Pay #5, $20K salary, $1K contribution, $1K match
Pay #6, $20K salary, $1K contribution, $1K match
Pay #7, $20K salary, $1K contribution, $1K match
Pay #8, $20K salary, $1K contribution, $1K match
Pay #9, $20K salary, $1K contribution, $1K match
Pay #10, $20K salary, $8K contribution, $1K match (increase withholding to hit the max employee contribution)

This gives a total match of $12,500! Sorry for the confusion due to my misunderstanding of the plan.


HERE IS THE ORIGINAL INCORRECT POST FOR POSTERITY:

Based upon what you describe, I do not think you are missing out on anything. As sailaway said, if you are contributing the max, you would still get your max employer match contribution.

What you are failing to understand is that if you were to have contributed to your 401k from your bonus, you would hit your max before the end of the year. Thus, in your last few pay periods, you would have no deduction and no match.

To make the math simple, let's say you have 10 pay periods per year. If you don't contribute from your bonus, here are your contributions and match per pay period

Pay #1, $20K salary, $2K contribution, $1K match
Pay #2, $20K salary, $2K contribution, $1K match
Pay #3, $20K salary, $2K contribution, $1K match
Pay #4, $20K salary, $2K contribution, $1K match
Pay #5, $20K salary, $2K contribution, $1K match
Pay #6, $20K salary, $2K contribution, $1K match
Pay #7, $20K salary, $2K contribution, $1K match
Pay #8, $20K salary, $2K contribution, $1K match
Pay #9, $20K salary, $2K contribution, $1K match
Pay #10, $20K salary, $1.5K contribution, $750 match (your last pay period would have only $1.5K withheld since the max employee contribution for the year if under 50 is $19.5K)

That gives you a total employee contribution of $19.5K and employer contribution of $9750, which is the most that you can get based upon your plan.

Now let's say after pay period 2 you contributed 10% of your bonus

Pay #1, $20K salary, $2K contribution, $1K match
Pay #2, $20K salary, $2K contribution, $1K match
BONUS, $50K bonus, $5K contribution, $2.5K match
Pay #3, $20K salary, $2K contribution, $1K match
Pay #4, $20K salary, $2K contribution, $1K match
Pay #5, $20K salary, $2K contribution, $1K match
Pay #6, $20K salary, $2K contribution, $1K match
Pay #7, $20K salary, $2K contribution, $1K match
Pay #8, $20K salary, $500 contribution, $250 match (you can only contribute $500 since this brings you to your $19.5K max employee contribution)
Pay #9, $20K salary, $0 contribution, $0 match (since you have reached the employee max, you can no longer contribute)
Pay #10, $20K salary, $0 contribution, $0 match

This gives you a total employee contribution of $19.5K and employer contribution of $9750. SAME AS ABOVE.

What is happening is that the bonus is just allowing you to accelerate your 401k contributions, but since the max employee contribution doesn't change, that means that you max out your contributions earlier in the year.

So in conclusion, I don't see how you are missing out on anything because you didn't contribute from your bonus, since you are still going to hit the max regardless.
Last edited by humblecoder on Tue May 11, 2021 12:55 pm, edited 2 times in total.
Jags4186
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Re: 401k contributions from annual bonus

Post by Jags4186 »

If your 401k plan is set up like mine you blew it. I get my match based on pay period. Every year at bonus time I change my contribution to the lowest amount possible for that pay period to get the full match and then adjust the rest of my paychecks for the remainder of the year.
johnubc
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Re: 401k contributions from annual bonus

Post by johnubc »

Look at past statements - or ask HR - does your company do a true-up on contributions.

Many companies do - although it may not be well known as folks are just not aware (as many people do not max out the contribution).
Hyperchicken
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Re: 401k contributions from annual bonus

Post by Hyperchicken »

humblecoder wrote: Tue May 11, 2021 11:57 am ...
What you are failing to understand is that if you were to have contributed to your 401k from your bonus, you would hit your max before the end of the year. Thus, in your last few pay periods, you would have no deduction and no match.
...
Only if OP kept contributing at 10%. Why are you assuming that?
humblecoder
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Re: 401k contributions from annual bonus

Post by humblecoder »

Hyperchicken wrote: Tue May 11, 2021 12:26 pm
humblecoder wrote: Tue May 11, 2021 11:57 am ...
What you are failing to understand is that if you were to have contributed to your 401k from your bonus, you would hit your max before the end of the year. Thus, in your last few pay periods, you would have no deduction and no match.
...
Only if OP kept contributing at 10%. Why are you assuming that?
Upthread, the OP said that they are contributing 10% of their salary each pay period. :D
Hyperchicken
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Re: 401k contributions from annual bonus

Post by Hyperchicken »

humblecoder wrote: Tue May 11, 2021 12:28 pm
Hyperchicken wrote: Tue May 11, 2021 12:26 pm
humblecoder wrote: Tue May 11, 2021 11:57 am ...
What you are failing to understand is that if you were to have contributed to your 401k from your bonus, you would hit your max before the end of the year. Thus, in your last few pay periods, you would have no deduction and no match.
...
Only if OP kept contributing at 10%. Why are you assuming that?
Upthread, the OP said that they are contributing 10% of their salary each pay period. :D
Sorry, you missed the point. Again, why are you assuming that OP would have contributed at 10% throughout the remainder of the year?
humblecoder
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Re: 401k contributions from annual bonus

Post by humblecoder »

Hyperchicken wrote: Tue May 11, 2021 12:30 pm
humblecoder wrote: Tue May 11, 2021 12:28 pm
Hyperchicken wrote: Tue May 11, 2021 12:26 pm
humblecoder wrote: Tue May 11, 2021 11:57 am ...
What you are failing to understand is that if you were to have contributed to your 401k from your bonus, you would hit your max before the end of the year. Thus, in your last few pay periods, you would have no deduction and no match.
...
Only if OP kept contributing at 10%. Why are you assuming that?
Upthread, the OP said that they are contributing 10% of their salary each pay period. :D
Sorry, you missed the point. Again, why are you assuming that OP would have contributed at 10% throughout the remainder of the year?
I feel like there is a disconnect. Can you elaborate with an example?

EDIT: No need to elaborate. I think I understand the flaw in my logic. The person could lower their contribution in order to capture additional match. Is that right?
Last edited by humblecoder on Tue May 11, 2021 12:47 pm, edited 1 time in total.
dred pirate
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Re: 401k contributions from annual bonus

Post by dred pirate »

I find myself in a similar position, luckily our bonus comes in November each year, AND we get a month's notice of the amount, that way we can adjust the amount accordingly - my company does not "true up" at the end of the year. They will match 50 cents on the dollar up to 10% (I put in 10% they put in 5%, I put in 40%, they still only put in 5%).
But ya - need to first find up if they true up the match at the end
Hyperchicken
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Re: 401k contributions from annual bonus

Post by Hyperchicken »

humblecoder wrote: Tue May 11, 2021 12:40 pm EDIT: No need to elaborate. I think I understand the flaw in my logic. The person could lower their contribution in order to capture additional match. Is that right?
Exactly! It's a game, hit the max contribution amount, but stay above 5% contribution (in OP's case) with every paycheck including bonus.

401(k) plans make this unnecessarily complex, in my opinion, but I guess oh well. The alternative is to find out how well true-up match works in practice. I did once, and it did not work. Others may have better plans so they will receive their full match eventually.
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