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Company matching different under Roth 401K ?
Old 06-30-2014, 01:14 PM   #1
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Company matching different under Roth 401K ?

Megacorp offers 100% matching up to 6% of pay. Employee contributions can be to Pre-tax 401k, Post-tax 401k, or Roth 401k (just added last year).

Believe I read somewhere that there's "something funky" about company matching contributions - that these contributions can only be to aftertax 401k account ?

I can't fully understand example at this website:

Roth 401(k) Information - Case Studies

If I read this right, a person making 100k in 28% tax bracket, with a 1 to 1 match up to 6%:

1. If contributes to "regular" 401k $6k --> company matches $6k
2. If contributes to Roth 401k $6k --> the "equivalent after tax Roth contribution" is $6k - (0.28 * $6k) = $4320. And that's what the company matches ?

So in the second case the company's matching contribution is reduced by $1,680 ?

So complicated.....
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Old 06-30-2014, 01:41 PM   #2
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We used to contribute to DW's 401k and never noticed anything like that "equivalent" contribution. They made the usual company contribution amount, just to the regular 401k account. I think that is the normal method.

Is this a hypothetical question or a low company contribution you're trying to explain?
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Old 06-30-2014, 01:53 PM   #3
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This is just confusion because of how they describe the contributions. The max allowable contribution is the same between the Roth and Trad 401k, but because you pay income tax before contributing to the Roth they are trying to show that the combination of dollars contributed plus dollars in tax is more than the Trad case, where you pay no tax up front and only cost is the contributed dollars. This is more confusing because they don't make any effort to show the difference in tax when you withdraw the money, when Roth will be very much more favorable tax treatment.

If you only had a fixed dollar amount to contribute (less than the max allowed and less than the max your company would match) then paying part of those dollars in tax to make a Roth contribution will lower the amount you put in subject to matching. With less put in subject to matching, then you get less match.

On the other hand, if you contribute at least the full amount that your company matches, then this does not apply to you, plus you get all the benefit of the Roth when taking withdrawals, effectively increasing the value of your account when you start to draw from it.

It's a poorly worded explanation. Hopefully it doesn't apply to you.
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Old 06-30-2014, 01:57 PM   #4
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Matching funds from your employer have to go into the traditional 401(k). They don't pay tax on it, so someone has to pay tax on it and that's you eventually.

To my knowledge, it is exactly the same amount you would get if you had contributed the same amount to the traditional 401(k) instead of the Roth 401(k).

In the example linked the contributor contributed less to the Roth 401(k) than they would have to the traditional 401(k), so they got less from matching.
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Old 06-30-2014, 01:58 PM   #5
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Company match is still pretax, only your dollsrs are post. I believe.


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Old 06-30-2014, 02:14 PM   #6
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Quote:
Originally Posted by Animorph View Post
We used to contribute to DW's 401k and never noticed anything like that "equivalent" contribution. They made the usual company contribution amount, just to the regular 401k account. I think that is the normal method.

Is this a hypothetical question or a low company contribution you're trying to explain?
Not hypothetical. I thought it was a "no brainer" to use Roth 401k.

Then I heard something on Dave Ramsey that company contributions had to go to Before-tax account -- they could not go into a Roth 401k account. Then I found the above web link on this "equivalent contribution" ?

Animorph: do you contribute minimum to get total match or greater ? Maybe if someone contributes in excess of 6% (in this example) they don't bump into this "equivalent" contribution (if it exists).
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Old 06-30-2014, 02:49 PM   #7
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Quote:
Originally Posted by perlman View Post
If you only had a fixed dollar amount to contribute (less than the max allowed and less than the max your company would match) then paying part of those dollars in tax to make a Roth contribution will lower the amount you put in subject to matching. With less put in subject to matching, then you get less match.
So if company policy is "match up to 6% of pay", and employee only wants to contribute amount to get full match, then:

1. They should have 6% of pay deducted if employee contributions are going to Before tax 401k account (this would get $6k matching if a person made $100k)

2. They should have 8.33% of pay deducted if contributing to Roth 401k ? Say employee would pay 28% tax, so the net Roth IRA contribution would be 0.72 x 8.33 = 6.00% or $6k

If person in this example designated 6% Roth on contributions, the contribution would be $4,320 -- and company match would be same -- so the person would miss $1,680 in company contributions.

Above correct ?
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Old 06-30-2014, 03:03 PM   #8
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Quote:
Originally Posted by Delawaredave5 View Post
Not hypothetical. I thought it was a "no brainer" to use Roth 401k.

Then I heard something on Dave Ramsey that company contributions had to go to Before-tax account -- they could not go into a Roth 401k account. Then I found the above web link on this "equivalent contribution" ?

Animorph: do you contribute minimum to get total match or greater ? Maybe if someone contributes in excess of 6% (in this example) they don't bump into this "equivalent" contribution (if it exists).
I believe we were at the minimum at the time.
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Old 06-30-2014, 03:08 PM   #9
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OK, here's the problem from the link in the first post:

"No. George’s equivalent after-tax Roth 401(k) contribution is $1,740 - $261 ($1,740 x 15%), or $1,479. The match on the $1,479 Roth contribution is $739.50; therefore, if George contributes the equivalent Roth contribution, he loses $130.50 of the employer match.
George should make his contribution to the pre-tax 401(k) account."
It's a stupid answer, basically. "George" doesn't get the full company match because he only contributed what would have been an exact minimum for the match minus the taxes he would have owed on that amount. Since he didn't contribute the correct dollar amount to the Roth, he got shorted on the company match. Who the heck does that?
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Old 06-30-2014, 03:28 PM   #10
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Looked at my pay - I have 6% designated as Roth 401k contribution.

Looks like I have:
Gross pay
- minus taxes on gross pay
- minus 6% of gross as Roth 401k contribution
---------------
Equals Net pay

So this looks like "much to do about nothing" -the 6% contribution appears as a 6% of gross contribution and fully matched.

The example I found on the web was very confusing. Thanks for everyone's help !
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Old 06-30-2014, 04:20 PM   #11
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In general, contributing to a Roth 401(k) is ensuring that you will pay more income taxes than you need to. I would have said it's a no brainer to avoid the Roth 401(k) and contribute only to the traditional 401(k).

This is discussed practically every week on financial forums.
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Old 06-30-2014, 04:41 PM   #12
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Agree - comes down to expected tax rate in retirement vs today. If you expect your tax rate to go down (usually the case), I agree Pretax 401k pays less tax.

Roth 401k might be advised if:
- Your tax rate will be same (or higher) in retirement, and/or
- You don't want to add to your RMD requirements in the future.

But I'm hijacking my own thread.....
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Old 06-30-2014, 06:27 PM   #13
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They should have 6% of pay deducted
In the example you gave, if the employee elected a 6% deduction for Trad, then 6% of pay would be put in the Trad 401k and the employer would match the full 6%.

Likewise, if the employee elected a 6% deduction for Roth, then 6% of pay would be put in the Roth and the employer would match the full 6%.

Now in these two examples, the second scenario (Roth) would mean higher current income taxes, and that's what that poorly worded example of "equivalent" contribution was trying to explain, but it was very poorly described. As far as I know, no company does a secondary calculation to reduce your "contribution" by the equivalent tax amount before depositing in your Roth. That's just an attempt to illustrate the difference between Roth and Trad, but it doesn't actually work that way.

If you elected a 6% contribution, then your employer will put 6% in your 401k of whatever type you choose, and match accordingly - 6% in your example. You then pay whatever tax (higher or lower) depending on your detailed tax situation, but it makes no retroactive change to your 401k, nor does it affect your match.
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