Beware: Taxes may be triggered by your Roth 401(k) after-tax matching contribution

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Are you taking advantage of your employer’s Roth 401(k) after-tax matching contributions? While this can be a great way to boost your retirement savings, it’s important to be aware of the potential tax implications that may come with it. Our experts at Extreme Investor Network have some valuable insights to share to help you navigate this new landscape.

With the enactment of Secure 2.0 in 2022, employers now have the option to offer 401(k) matches in Roth accounts. This means that your contributions are made after-tax, but the growth and withdrawals in retirement are tax-free. Previously, Roth 401(k) matches went into pretax accounts. A recent survey from the Plan Sponsor Council of America found that roughly 12% of employers are definitely adding this feature, while 37% are still considering it.

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However, these new matching Roth contributions could have unintended consequences at tax time. According to Tommy Lucas, a certified financial planner, taking the match as Roth means you’re essentially receiving extra income, and taxes aren’t automatically withheld. This could potentially increase your adjusted gross income and result in higher tax liability.

“If you go this route, you’ll want to know that you’re basically getting extra income.” – Tommy Lucas, Financial advisor at Moisand Fitzgerald Tamayo

For example, if you earn $100,000 per year and receive a 6% employer match designated as Roth, you could face an additional $1,320 in tax liability if you’re in the 22% federal income tax bracket. This amount could be even higher when factoring in state income taxes. Furthermore, you won’t see your employer’s matching Roth contribution reported on Form W-2, but instead, you’ll receive Form 1099-R, which could be confusing.

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How to Plan for Income from Roth 401(k) Matches

If you’ve opted for Roth matches from your employer, it’s crucial to prepare for the extra income. Jim Guarino, a managing director and certified public accountant, suggests increasing your federal and state withholdings with your employer or boosting your quarterly estimated tax payments.

For example, if you anticipate $1,320 more in federal taxes, you can divide that amount by your remaining 2024 paychecks and include the extra withholding on Form W-4 for your employer. It’s essential to verify that the changes are reflected on future paychecks.

Working with a trusted tax advisor can help optimize your overall tax planning and reporting for the year. At Extreme Investor Network, we are here to provide you with the latest insights and strategies to navigate the complex world of personal finance and make informed decisions for your financial future.

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