The introduction of Secure 2.0 in 2022 allowed employers to offer 401(k) matches in Roth accounts, which are after-tax accounts where growth and withdrawals in retirement are tax-free. A recent survey found that approximately 12% of employers with 401(k) plans are definitely adding this feature, while 37% are considering it. However, these new matching Roth contributions could lead to unintended consequences at tax time, as explained by Tommy Lucas, a financial planner and enrolled agent. By opting for Roth 401(k) matches, employees essentially receive extra income, increasing their adjusted gross income and potentially leading to increased tax liability.
For example, if an employee with a $100,000 salary receives a 6% employer match designated as Roth, they could face an extra $1,320 in federal tax liability if they are in the 22% tax bracket. Depending on their state of residence, there may be additional state income taxes to consider. Furthermore, the matching Roth contribution will not be reported on Form W-2, but rather on Form 1099-R, which could be confusing for some individuals. Planning for this additional income is crucial for employees who have chosen Roth matches for 2024.
Jim Guarino, a certified financial planner and CPA, suggests increasing federal and state withholdings with the employer or boosting quarterly estimated tax payments to prepare for the extra income from Roth 401(k) matches. For instance, if an employee anticipates $1,320 in additional federal taxes, they can divide that amount by their remaining paychecks in 2024 and adjust their Form W-4 accordingly. It is essential to ensure that any changes made to withholdings are reflected accurately on future paychecks. Working with a trusted tax advisor can help optimize overall tax planning and reporting for the year.
It is crucial for employees who have opted for their employer’s Roth 401(k) after-tax matching contributions to be aware of the potential tax implications and plan accordingly to avoid any surprises at tax time. The decision to receive Roth matches can result in increased tax liability due to the additional income received. By increasing federal and state withholdings or making adjustments to quarterly estimated tax payments, employees can prepare for the impact of Roth 401(k) matches on their tax situation. Working with a tax advisor can help ensure that any changes made are accurate and optimize overall tax planning for the year.
