Gen Z Guide to FI

I am referring to Federal and California taxes for my corporate fire babies out there. If you’re in a different state, look up state specific supplemental income tax. Side note, if anyone knows any attractive accountants, send them my way. Good looks + tax knowledge is a turn on 😉 I remember when I had my first internship and I was offered $5000 sign on bonus. I was so excited but only about half of it entered my wallet. Corporate America really tapped into my trust issues there.

Most corporate jobs have some type of bonus structure usually based on the previous year of performance. But did you know that bonuses gets taxed at a much higher rate than regular pay? Last year (2022), my bonus was taxed at 49.9% which is significantly higher than my regular combined Federal & State tax rate of about 29%. Here is a breakdown of what made up that 49.9% tax rate.

I found the most tax effective solution for bonuses is to contribute as much of it to pre-tax 401k.

Wait, what the hell is a 401k? It is a retirement account that you can’t ‘really’ access till you’re 59.5 years old. I put the quotes on because there are ways to get that money but that is a rabbit hole for another day. If you have any corporate job, you most likely already have a 401k. Visit your company website or HR to learn more about options available at your organization. Public sector equivalent is a 403b or 457. Why should you contribute to your 401k? It reduces your taxable income.

Example: if you make 90,000 a year and contribute 22,500 (max 401k contribution for 2023), you are being taxed as if you make $67,500/year (90,000-22,500). Note, for this example that if didn’t contribute any money to your 401k, you WILL lose more money to taxes because you are in a higher tax bracket & there is more taxable income for the IRS to access. I know everyone has different financial obligations but I definitely recommend putting money into your 401k especially if your company matches your contributions. Compound interest works like magic so the earlier the better.

Back to bonuses, why would contributing 50-100% of my bonus to my 401k reduce my taxes? Let’s look at 3 scenarios if you got a $1000 bonus (for the sake of clean math).

Scenario 1 is for the YOLO homies who want to get as much money in their pocket today for vibes.

Scenario 2 is me currently. My company only lets me contribute a max of 50% of my bonus to 401k. I’m sure they know this “hack” is a great way to avoid paying high taxes.

If you do scenario 3, I’m jealous of you and can you DM me your job because I want it?

The summary of this post is if you are getting one or more bonuses in a year, this is a fantastic way to get out of paying really high taxes.If anyone else has any hacks or tips, feel free to comment or DM me @genzfirebaby on the gram.

xoxo genZ Fire Baby