Weighing my options: maxing 401k via annual bonus vs spread out over the year?

Submitted by xxxITthrowaway t3_z907wc in personalfinance

As title suggests, I've got the option to max out my 401k via my bonus with my new job. In the past, I've just spread it out over the year. I'm trying to weigh pros/cons of either strategy:

  • Company will do a once a year, true up match so I don't miss any matching when maxing with bonus vs doing it over the year. So no real difference from a matching perspective.
  • Maxing via bonus:
    • If I get laid off, I'd miss out on any potential matching from a new employer
    • I get to have a 'full' paycheck the rest of the year
    • Unsure if there are any tax implications from maxing via bonus when bonuses usually are withheld at the maximum amount? (~40% withholding is what I've seen in the past)
    • Technically, money is in the market longer
  • Maxing via spread out over the year:
    • (The opposites of the above)

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Are there any other obvious pros/cons that I'm missing?

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Werewolfdad t1_iye8ohh wrote

It doesn't meaningfully matter. I did analysis using portfolio visualizer and across 20 years, if investing in VTSAX, the final difference in balance is less than 1% (not per year, in total) between investing 20500 up front on Jan 1 vs spread through the year . For a longer time frame, the difference would be smaller

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Rxpert83 t1_iyeeiqx wrote

If the market goes up, doing it all right away is better.

If the market goes down, slowly throughout the year is better.

It's anybody's guess for what happens next year, the choice is yours.

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Rave-Unicorn-Votive t1_iyefslb wrote

I was in a position to do this in 2022, my thoughts on your bullet points…

>If I get laid off, I'd miss out on any potential matching from a new employer

Unless you're in a volatile industry/company or in an industry where 50% - 100% no-limit maxing is common, 1) what's the likelihood and 2) how much money are we really talking about?

>I get to have a 'full' paycheck the rest of the year

But don't get too used to it, because it will go back to a less-than-full paycheck next year. (Unless the bonus is a fairly certain thing and you'll use it to max each year.)

>Unsure if there are any tax implications from maxing via bonus when bonuses usually are withheld at the maximum amount?

Nope. Bonuses aren't withheld at the maximum amount, they're withheld at the supplemental amount. 40% suggests you might be in CA so anything not sent to the 401k will still be withheld at the 22% and 10.23% supplemental rates for fed and state.

>Technically, money is in the market longer

Negligible over the decades-long time horizon, but fun to say "I've maxed out my retirement accounts" early in the year.

>Are there any other obvious pros/cons that I'm missing?

Not really. If you're definitely, absolutely, no doubt about it going to max your 401k for the year then there's almost no con to doing it early and in a lump sum. If you're stretching yourself to max it, it's probably safer to spread it out in the event things go sideways.

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xxxITthrowaway OP t1_iyejq1w wrote

Replying to Rave-Unicorn-Votive (#823,023)

These are good thoughts, thank you. The bonus is actually part of my TC so I'm ok with this becoming the new norm (if things go well, this'll be my last job before I retire early). I've been maxing my 401k for a decade so I'm used to the old paycheck amount and I've got plenty of emergency savings in case things go sideways (they went VERY sideways earlier this year and I used <10% of my e-fund).

And I like the idea of 401k just being 'done' for the year - hence why I'm asking to see if I'm missing anything glaring.

Thanks!

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Rave-Unicorn-Votive t1_iyen591 wrote

Replying to xxxITthrowaway (#824,483)

> And I like the idea of 401k just being 'done' for the year

It's 99% psychologically and 1% financially advantageous to be "done" early…it sure is fun. :-)

With this additional info, if I were in your shoes, I'd use the bonus to max early without a second thought. My bonus was a bonus bonus (one-off) so I'll most likely go back to spread out next year and the only drawback that's even crossed my mind is that I need to remember my paychecks will be lower in January.

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