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Is there a tax advantage to putting 100% of my bonus into 401k? From looking at my pay stubs, my bonus gets taxed at a higher rate than my regular paychecks. And since traditional 401k contributions are pre-tax, the thinking is that contributions from my bonus paycheck will save me more in taxes than contributions from my regular paychecks.

Is my thinking correct? Can you provide evidence to support your answer?

(The answers to a similar question entitled Using bonus in a tax-efficient way with my 401k account? either lack detail or misunderstand the question.)

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@littleadv - The accepted answer (at other question) was lacking. mbhunter came close. Actually, other question should be closed as dup of this one which happens to have a spot-on answer. –  JoeTaxpayer Dec 17 '12 at 18:10
    
How would you contribute 100% of your bonus to your 401(k)? Every place I've ever worked, I set a contribution to my 401(k) (in various ways), and that amount came out starting with my next paycheck. You can't contribute to a 401(k) directly either. –  stannius Jan 16 '13 at 1:10
    
My 401k provider lets me specify an amount (in dollars or percent) to contribute from my bonus check. If there were a tax advantage I could sat it to 100%. –  Christopher James Calo Jan 16 '13 at 3:35
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1 Answer

up vote 15 down vote accepted

Your bonus is taxed at exactly the same rate as the rest of your salary, its just the withholding that differs (because the bonus isn't fitted into the regular withholding calculations). It will all be normalized on your annual 1040.

Is there a tax advantage to putting 100% of my bonus into 401k?

No. You can adjust your withholding rate using updated form W4, to account for the extra withheld because of the bonus.

From looking at my pay stubs, my bonus gets taxed at a higher rate than my regular paychecks.

Bonus tax withholding can be upwards of 40% after federal (25%) and state taxes. For some its higher rate, for others it may in fact be lower.

Federal withholding for lump-sum payments is usually flat 25% (usually, because the employers can, if they want to, adjust their withholding calculations to account for the bonus, and then withhold the "regular" amount. But it usually complicates the accounting and most chose not to). Similarly, State withholding is probably calculated at some State-mandated high (closer to the highest bracket) rate. That makes the lump-sum tax calculation simple, but for most people - the withholding will be higher than the actual tax liability. For some (high earners) it will be the opposite - the flat-rate withholding will be lower than their marginal tax and they'll end up underpaying their taxes.

And since traditional 401k contributions are pre-tax, the thinking is that contributions from my bonus paycheck will save me more in taxes than contributions from my regular paychecks.

No, because the 25% is the withholding, not the actual tax. The actual tax on your whole compensation is calculated using your marginal rates. You'll get the actual amount when you fill your tax return. If because of the extra withholding on your bonus you ended up paying more than you should have - you'll get a refund from the IRS.

Here's an article on askcpa on this exact question.

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