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Lump sum 401k contribution in January? Pros/cons.

Home Personal Finance and Budgeting Lump sum 401k contribution in January? Pros/cons.

  • Avatar spiritrider 
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    Is this a solo 401k? I don’t see a reason not to. It should come out ahead in the long run (though not every year). The old lump sum vs dca debate.

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    It seems pretty clear from the OP, that this is primary employment. However, similar time restrictions apply to self-employed individuals.

    Keep in mind that like a W-2 employee, employee elective contributions to a one-participant 401k can only come from compensation (self-employed earned income) as it is received. So you can not just make the full $19K contribution on 1/1. Generally, it can only be 100% of self-employed earned income (business profit – 1/2 SE tax) as it is received. However, there is a special rule that allows a “reasonable pro-rated projection” of the year’s compensation.

    Examples are:

    • $5K self-employed earned income each week. $5K could be contributed at the end of weeks 1 – 3 and $4K at the end of week four.
    • The same schedule could be completed if the individual expected to have self-employed earned income for the year = $260K. This would be true even if the individual had no self-employed earned income in the first four weeks.
    • Lower current or pro-rated projected self-employed earned income would require longer to make the full contribution.
    • The rules related to the timing of contributions are found in 26 CFR § 1.401(k)-1
    #239743 Reply
    Liked by childay
    MPMD MPMD 
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    Status: Physician
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    i always lump sum my solo 401k contribution but not my regular one.

    workplace 401k only matches on months that you contribute. this is actually annoying where i work b/c the contribution has to be a percentage not a flat # so w/ fluctuations and bonuses we often ended up missing Dec match.

    with solo 401k i wait until tax season and verify my math then lump sum it.

    #239843 Reply
    Liked by AZPT
    IlliniGopher IlliniGopher 
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    Status: Physician
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    dollar cost averaging

    "Comparison is the thief of joy." - Teddy Roosevelt

    #239856 Reply
    Avatar Infinity 
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    Splash Refinancing Bonus

    On average, stocks have more gains from Nov to May than from May to Nov.

    This adds another benefit of lump sum in Jan over DCA.

     

    #239859 Reply
    portlandia portlandia 
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    Status: Physician
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    Joined: 07/07/2017

    Lump sum the 401K, Roths and maybe the HSA. Just be aware of the IRS regulations regarding HSA contributions.

     

    https://cashmoneylife.com/hsa-contribution-limits/

    “The last-month rule allows eligible individuals to make a full contribution for the year even if they were not a qualified individual for the entire year. They can make the full contribution for the year if:

    • They are eligible individuals on the first day of last month of their taxable year. For most people, this would be December 1, and
    • They remain eligible individuals during the testing period. The testing period runs from December 1 of the current year through December 31 of the following year (for calendar taxpayers).
    • If the taxpayer does not qualify to contribute the full amount for the year, the contribution is determined by using the sum of the monthly contribution limits rule.

    OR

    • Sum of the monthly contribution limits rule (use Limitation Chart and Worksheet in Form 8889 Instructions). This is the amount determined separately for each month based on eligibility and HDHP coverage on the first day of each month plus catch-up contributions. For this purpose, the monthly limit is 1/12 of the annual contribution limit, as calculated on the Limitation Chart and worksheet.

    In other words, you can contribute the full amount if you are eligible as of Dec 1, of the calendar year. However, you may owe back taxes if you do not remain eligible from January 1 – December 31 of the following year.”

    #239877 Reply
    Liked by Infinity
    Avatar jacoavlu 
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    Status: Physician, Small Business Owner
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    Joined: 03/01/2018
    On average, stocks have more gains from Nov to May than from May to Nov.

    Click to expand…

    data?

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #239888 Reply
    Liked by octopus85, Peds
    Avatar Peds 
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    None.

    #239896 Reply
    Liked by AZPT
    Avatar octopus85 
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    dollar cost averaging

    Click to expand…

    Why?

    #239898 Reply
    Avatar Infinity 
    Participant
    Status: Physician
    Posts: 92
    Joined: 05/25/2019

    On average, stocks have more gains from Nov to May than from May to Nov.

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    data?

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    Since 1950, the S&P 500 has averaged a total return (price gains plus dividends) of 7.0% between the beginning of November and the end of April. In those 68 instances, the index mustered some degree of gain almost 77% of the time. Between early May and late October using data looking all the way back to 1950, the S&P 500 has averaged a 1.5% gain for the six-month stretch, and only made net progress in about 64% of those 68 years.

    People say “Sell in May and Go Away”

    #239915 Reply
    Avatar Hober Mallow 
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    Status: Other Professional, Spouse
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    I read an article recently discussing this – I thought it was here or on Physician on Fire but I couldn’t find it.

    The gist was that if you are maxing out tax-deferred accounts and contributing extra to a taxable account, it’s preferable to front-load the taxable account and fund the tax-deferred late in the year.

    The deduction for a tax-deferred account is the same regardless of when in the year a contribution is made.  By front-loading taxable, more investment growth will occur in that account.  That’s preferable because of the lower tax rates when the funds are eventually withdrawn – a dollar in a taxable account is worth more than a dollar in a tax-deferred account.

    This assumes you’re (1) not missing out on any match and (2) not in danger of being fired mid-year and losing the ability to make the contributions at all.

    #239922 Reply
    Liked by AZPT
    Avatar EntrepreneurMD 
    Participant
    Status: Physician
    Posts: 337
    Joined: 06/10/2019
    On average, stocks have more gains from Nov to May than from May to Nov. 

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    data?

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    I have seen this data from multiple sources a well. It is a well known long term historical trend.

    https://education.howthemarketworks.com/news/best-months-for-stocks/

    #239929 Reply
    Liked by Infinity
    Avatar ZZZ 
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    Status: Spouse
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    Someone who can afford to drop 19k into a 401k in January is likely earning and investing sizeable sums throughout the year, and will be dollar cost averaging their entire earning career.

    If u want to fill it up, fill it up. The small delta either was is going to be a rounding error for a high earner.

    #239952 Reply
    Liked by Lordosis
    Avatar jacoavlu 
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    Status: Physician, Small Business Owner
    Posts: 2382
    Joined: 03/01/2018

    On average, stocks have more gains from Nov to May than from May to Nov.

    Click to expand…

    data?

    Click to expand…

    Since 1950, the S&P 500 has averaged a total return (price gains plus dividends) of 7.0% between the beginning of November and the end of April. In those 68 instances, the index mustered some degree of gain almost 77% of the time. Between early May and late October using data looking all the way back to 1950, the S&P 500 has averaged a 1.5% gain for the six-month stretch, and only made net progress in about 64% of those 68 years.

    People say “Sell in May and Go Away”

    Click to expand…

    Fair enough. I would argue that’s not really actionable data. Certainly not to be extrapolated to apply to a Jan lump sum question.

    “Sell in May and go away” seems to ignore the fact that the market also averages upward from May to Nov. Wouldn’t one rather have 8.5% growth than 7.0%?

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #240010 Reply
    Liked by Peds

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