In most cases, you can allocate 100% of your bonus, but only a percentage of your salary. While the money enters the plan on a pre-tax basis, while retaining the chance to grow on a tax-deferred basis, some plans require that the Medicare tax must be paid up front.
Companies with a 12/31 fiscal year end will frequently approach their executive plan participants in October and November to determine what percentage of salary and bonus an executive wishes to contribute to the plan. This is the time for you to take out the crystal ball and speculate about what will happen to you and your family’s cash flow in the coming year. Will there be enough money set aside for emergencies? What should your budget look like? How much cash flow will you need?
It’s only after taking your best guesses at those questions with the help of a financial advisor that you can make an informed decision about what percentage of your compensation should be deployed to your employer’s plan.