Can I contribute to my 401(k) from a bonus, and how is it taxed?

Whether your bonus is eligible for 401(k) deferral depends on your plan's definition of compensation and its rules; many plans do allow you to defer a percentage of bonuses, and some let you set a separate, higher deferral rate for bonus pay. Deferring a bonus into a traditional 401(k) shelters it from current income tax.

Bonuses are subject to federal supplemental withholding (a flat 22% up to $1 million), so deferring some into a pre-tax 401(k) can reduce the taxable portion. Check whether your plan applies your regular deferral percentage to the bonus automatically or lets you elect a special rate. Watch that a large bonus deferral does not blow past your annual limit. Directing bonus money to retirement is a painless way to boost savings without touching your normal paycheck.