The Internal Revenue Service classifies a bonus as taxable compensation, so Uncle Sam is going to want a big chunk of it. Bonuses are added on top of your other income and are taxed at the percentage rate for your highest tax bracket -- or even more if the bonus money pushes you into the next bracket. However, you may be able to avoid taxes by putting your bonus into a 401(k).
Sheltering Your Bonus
The IRS has no rule against adding your bonus to a 401(k), but some company plans won't allow you to do so. Contact your 401(k) plan administrator to find out. In addition, the IRS sets a maximum annual limit for 401(k) contributions that is adjusted periodically for inflation. At the time of publication, the limit was $17,500, going up to $23,000 for those over age 50. The amount of bonus money plus other contributions to the 401(k) cannot exceed the limit. For example, if your limit is $17,500 and you already contributed $9,000, you can contribute a maximum of $8,500 in bonus money for the year.
Video of the Day