Roth 401(k) matches under SECURE Act 2.0 may mean a tax bill for you

If your company offers you a Roth 401(k) match, you must contribute enough to trigger that free money to grow your retirement savings.

However, be aware that this financial move can lead to a tax bill.

The SECURE Act 2.0, passed in December 2022, allowed employers to match Roth 401(k) contributions directly to Roth accounts for the first time. Before the new law, an employer was required to establish his second traditional 401(k) for retirement contributions.

However, the new rules also have their drawbacks.

Keep in mind that Roth 401(k) contributions are taxed, so you, the employee, can withdraw the money without paying taxes in retirement.

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But for employers, it’s different. Just like if your company matches a traditional 401(k), contributions to your Roth 401(k) from the match are pre-tax.

This means that you will have to pay taxes in the year that your company’s Roth contributions are made.

“The biggest pitfall…is not forgetting to cover employer contributions,” said Mark Steber, chief tax information officer at tax firm Jackson Hewitt.

For example, if your employer contributes $500 to your Roth 401(k), that’s $500 of your income you have to pay taxes on, he said.

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What taxes do I have to pay?

You must pay federal taxes on the amount your employer contributes each year.

“You’ll receive a 1099-R with code G in Box 7,” said Mark Yeager, vice president of tax operations at tax software company TaxAct. “This amount will be included as ordinary income on (your) tax return.”

If you live in a state with an income tax, you’re responsible for paying taxes there as well, he added.

Are you reporting your Roth 401(k) for taxes?

Your contribution is Appeared in W-2However, since it is after tax, there is no need to report it on your tax return.

However, if you have direct Roth 401(k) contributions from your employer, they will appear on the 1099-R you must receive and should be reported. Tax will be charged on that amount.

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How should I pay taxes?

There are several options for paying taxes, tax experts say.

Report your donations as part of your income on your tax return and pay them when you pay your taxes.

If you don’t want to pay too much tax when you file your taxes, submit a new W-4 to your employer to increase your federal withholding from your W-2.

Pay estimated taxes quarterly to cover additional taxes.

If you live in a state that imposes an income tax, you may want to do the same in that state, Yeager said.

What is the 2024 contribution limit for a Roth 401(k)?

If you’re under 50, the maximum amount you can contribute to a Roth 401(k) in 2024 is $23,000.

If you’re 50 or older, you can add an additional $7,500 a year in “catch-up” contributions, for a total of $30,500 a year.

Employer matching contributions do not count towards individual contribution limits, but there is a limit for combined employee and employer contributions. In 2024, it will be the lesser of 100% of your salary or $69,000 (excluding catch-up contributions).

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How were Roth 401(k) matches handled before SECURE Act 2.0?

Prior to SECURE Act 2.0, employees contributed funds to Roth 401(k)s, but a second traditional 401(k) was established for employer contributions. I did.

For example, you contribute $2,000 in after-tax dollars to your Roth 401(k), but your employer matches that and $1,000 in after-tax dollars to your traditional 401(k).

“If you want to convert a traditional 401(k) to a Roth 401(k), you pay regular taxes (no special capital gains rate) on that $1,000, plus or minus any gains or losses you earn through the account. ” said Yeager.

Effective with SECURE Act 2.0, contributions will be: You contribute $2,000 in after-tax dollars to your Roth 401(k), and your employer matches $1,000 to your Roth 401(k). Your employer issues you a 1099-R and you must pay taxes on her $1,000.

How many companies offer a Roth 401(k) match?

More than 90% of retirement plans offer a Roth 401(k) option. According to major securities firm Fidelity,However, so far there are not many that offer matches in the latest format.

15 percent According to the Plan Sponsor Council of America, an industry group, it added an optional provision in SECURE 2.0 that allows participants to choose how their employer contributions are treated as losses, and one in four He said he was actively considering this provision. Nearly 40% have not implemented this provision and will not implement it in the future, while the rest are not sure.

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Roth 401(k) matches under SECURE Act 2.0 may mean a tax bill for you

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