Matching Roth contributions: potential pitfalls
The SECURE 2.0 Act added an option for employees who receive matching contributions from their employers to their 401(k) plans or other qualified plans. If your plan allows, you can choose to receive employer matches as after-tax Roth contributions. To avoid unpleasant surprises, however, assess the impact of such contributions on your tax bill. After-tax contributions increase your income for the year, but your employer may not automatically withhold the necessary extra taxes.
Suppose your salary is $150,000, and your employer makes matching contributions to your 401(k) account equal to 6% of your salary ($9,000). Assuming you’re in the 24% tax bracket, you’d end up owing an extra $2,160 in federal income tax for the year ($9,000 x 24%) if you opt to take the employer match as a Roth contribution. Plus, you might also owe extra state income tax. To avoid underpayment penalties, consider increasing your withholdings or quarterly estimated tax payments to cover the additional tax liability.
This material is generic in nature. Before relying on the material in any important matter, users should note date of publication and carefully evaluate its accuracy, currency, completeness, and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances.
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