[dkny21]

Hi, End of year bonus are taxed at a higher bracket than your regular wage tax bracket.

Would I save money by deferring most of my end of year bonus to a 401K plan; therefore when I withdraw my 401K at retirement it would be taxed lower at my income tax bracket.

For example, my federal tax bracket is 28%; however my bonus was taxed at almost 45%. Therefore I feel like I would save money in taxes by deferring that to a 401K.

Thanks

[ScottGem]

Where did you get the idea that a bonus is taxed differently from regular salary? It may be that taxes are WITHHELD at a different rate, but that's different from how taxes are calculated. Cash bonuses are considered regular income and are included on your W2 form. They are reported along with your other W2 income. They are taxed at the same rate as all your W2 income.

It is, however, common for taxes to be withheld at a higher rate. Most payroll programs, calculate withholding based on an annualized figure for the current gross. So lets say you normally get paid weekly and you get paid $2K per week. So your taxes are withheld based on a $104K annual salary. Now you get a bonus check for $10K. Since the software annualizes it, it bases the withholding on a $520K annual salary, which would entail a higher withholding.

So, when you do your return, you will get back a bigger refund since you would be taxed on $114K not $520K.

As far as putting it into your 401K, if you are under contributed for the year, some plans do permit a lump sum catchup contribution. This would reduce your taxable income for the year, and defer the taxes until you start taking money out of the plan. If you were undercontributed and your plan allows for a catchup, it wouldn't be a bad idea to make the contribution. But it wouldn't change your withholding.

[AtlantaTaxExpert]

Scott's advice is excellent.