Hello! 23 y/o, 2nd year analyst who is ~hopefully receiving her first bonus and wondering what tax elections / retirement elections I should make? I max my Roth, and should be close to maxing my 401K, but wondering if it makes sense to dump it in trad 401K to avoid the taxes? Otherwise would I just keep my normal paycheck contributions and call it a day? Thanks!

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Dump it in 401k

smart

At ZS we don’t have the option to do this with our bonuses, in the case you do do this, but if you can’t you can just allocate a bigger % / or 100% of your paycheck that comes at the same time of the bonus so you can basically contribute using the bonus

How is your emergency fund looking? How about medium term savings (like a house down payment)? I usually recommend Roth > 401k employer match > emergency fund > HSA (personal preference) > high yield savings account if you have a housing/car goal > 401k max > investing

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This is super clear! My emergency fund is full, and I’m sitting on plenty of cash with how the market is now. Roth maxed, employer contributes regardless of mine, and I put everything else into investments. No car / no plans for a car or house soon

Do you have the option to contribute it to a Roth 401k? You’re very young. What’s your annual income including retirement contributions and bonus? If you end up being in the 12% income tax bracket or lower based on your AGI, then put it in a Roth 401k.

Assuming you’re single and not MFJ, you would be either in the 22% or 24% tax bracket. It’s up to you and your projection if you want to put it in a Roth 401k or traditional 401k. At those rates, I would put it in a traditional 401k and invest the rest in an individual bromate account when you max out.

In the vast majority of cases it makes sense to fund your traditional (not Roth) 401(k), irrespective of how much you make now and how much you anticipate making later. The reason is three fold: 1. Your immediate marginal income tax rate goes down (your taxable income goes down), 2. The tax that you would have paid if funding a Roth 401(k) is never going to come back, 3. When you retire, you can convert your 401(k) to a Roth IRA, by paying very little to no tax on the entire value of the account. So by funding a Roth 401(k) you not only lose out on the tax dollars you pay upfront but also years of growth on those lost dollars.

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