Live off Signing bonus to reduce taxes

[bellewroy]

Questions regarding a unique situation:

TL;DR:
I am contemplating how to best handle a signing bonus while reducing the tax burden. I am considering deferring 100% of my fellowship salary (the last 6 months of fellowship) into a 403b and a 457 while living off my signing bonus and other savings until I start my job in August.


Background:
I recently came into two windfalls: 1. Selling property and 2. A signing bonus.
I am in my final year of fellowship (making ~$66,000 July ’21 - June ’22) and therefore my final year in a low tax bracket. That being said, I have the option of contributing to my University’s 403b and 457. Jan 2022 will start 6 months left and I can contribute 100% of my fellow salary into retirement accounts ($20,500 to 403b and the remaining in the 457).
When I start my career in Aug 2022, I will have 4-5 months of full salary and this will significantly raise my tax bracket. I project that if I fund the tax-deferred accounts (403b and 457) I will lower my tax burden and save ~$7200 on federal income taxes alone.

When I start my career, I should be able to roll over the 457 and 403b into the company’s 401k.
Furthermore, I should also be able to still contribute the 2022 max to my 401k which is $20,500.

Benefits to the funding retirement:
1. $7200 in federal income tax savings
2. Est. ~$3,000 in State income taxes (If I calculated this correctly)
3. Putting this income in these 2 accounts would lower AGI enough to where I would qualify for the student loan interest deduction (~22% on $2,500= $550)
4. Jump start to retirement accounts ($20,500 in 403b, $12,500 in 457, and $20,500 in 401k = $53,500 (not including employer match!)).

Estimated lower tax burden of $10,700 — Making the return on investment ~32% ($10,700/$33,000).


Alternatives to do with the Signing Bonus:

1. Pay off student loans which are at 3.75%
A. This would be about $1,237.50 savings on interest ($33,000*0.375)
a. A 3.75% return on “investment”
2. Cocaine and hookers (Joke Dr. Dahle says on the podcast)
3. New Sleep Number Bed (Affiliate link here—lol I wish)


Questions:

1. Is this a good strategy/good idea conceptually

A. Am I thinking about this correctly?

2. Am I allowed to give the max to the 403b until June 2022 AND give the max to my 401k from Aug 2022 through December?

3. I called the holder of the 457 and asked if this could be transferred to the future company’s 401k — they said yes. Is this correct?

4. Anything else I should do with the signing bonus?

Further background:

1. My wife and I are both funding our Roth IRAs.
2. This will not exhaust my money in savings much of which will go toward student loans

[pierre]

2. Am I allowed to give the max to the 403b until June 2022 AND give the max to my 401k from Aug 2022 through December?

No. 403b and 401k have a combined contribution limit. You should definitely max one of them though.

[Larry Ragman]

Welcome to the Forum. A few thoughts:
1. As Pierre says, even if the employers are unrelated you only get one individual contribution limit - $20.5k next year - across all 401k/403b accounts.
2. However, many 401k/403b plans are now allowing after tax contributions. The great part about that is that the IRS also allows a total of $61k per plan, including employer contributions and personal after tax contributions. You could potentially put away $122 next year if both plans allowed after tax contributions. Read this link, but you will need to check each plan. https://www.whitecoatinvestor.com/multiple-401k-rules/
3. If either or both plans allowed in service withdrawals, you could even roll over the after tax portion to the 401k/403b Roth thus completing the illusion mega Backdoor Roth transaction. (Note: this is under threat by a current House bill, but for now sanctioned and legal.)
4. Just because you can invest doesn’t mean you necessarily should. Whether or not you aggressively pay down loans is a personal choice. I would do this first. But some prefer to leverage the relatively low interest to keep money invested. Try to set some goals, then make a plan you can stick to. No true right answer here.
5. 457b plans are tricky. Certainly if a governmental plan you should be able to roll it over, but not if nongovernmental. Also, the receiving plan may or may not accept 457b rollovers. See if you can get copies of the plan summaries. Verbal answers on this topic are wrong surprisingly often.