How is the Match taxed on a Roth 401k?

[Time2]

My son has a Roth/401k at work, the company has a match, that is dependent on company profits and paid once a year
I have read that company matches that are put in a Roth/401k are taxed at withdrawal. Is that true?
For 2023 he put in $22,500 and the company match (Dec5) was $3,675.
How is that treated? I don't see how it is taxed. I have ask him to ask his employer, today is the first time I pushed it enough that now he at least understands why I ask the question.


EDIT: While looking at company documents, he did find employer contributions go into a separate traditional 401. Now, I told him to make sure his portion is going into a Roth 401k.

 

[qwerty3656]

Typically, whether you fund a Roth or regular 401k, the company match goes into a regular 401k.

 

[Phroig]

My son has a Roth/401k at work, the company has a match, that is dependent on company profits and paid once a year
I have read that company matches that are put in a Roth/401k are taxed at withdrawal….

SECURE 2.0 allows your son to specify that the match be put in his Roth 401K account. He will have to pay tax on the amount. Under previous rules, Roth 401K matches went into Traditional 401K accounts and were taxed when withdrawn.

 

[euro]

My son has a Roth/401k at work, the company has a match, that is dependent on company profits and paid once a year
I have read that company matches that are put in a Roth/401k are taxed at withdrawal. Is that true?
For 2023 he put in $22,500 and the company match (Dec5) was $3,675.
How is that treated? I don't see how it is taxed. I have ask him to ask his employer, today is the first time I pushed it enough that now he at least understands why I ask the question.


EDIT: While looking at company documents, he did find employer contributions go into a separate traditional 401. Now, I told him to make sure his portion is going into a Roth 401k.

Are you sure those contribution numbers are correct? I have been FIREd for a while now and things may have changed but in the old days, the TOTAL contribution would have maxed out (in this case at $22500). In other words, the employee contribution plus the match could not exceed the maximum.
Might want to check on that because he may have over-contributed. Hard to believe the payroll guys at the company would not have caught that but if it is a smaller company, who knows.

 

[euro]

As far as a match being taxed at withdrawal, I seriously doubt that. How would anyone keep track of that. I doubt you could even use form 8606 for this. After all, this would run counter to the general mantra for Roth accounts that "all withdrawals are exempt from taxes".
My guess is that the match will be included on his W2 as some sort of taxable compensation

 

[Mark1]

Are you sure those contribution numbers are correct? I have been FIREd for a while now and things may have changed but in the old days, the TOTAL contribution would have maxed out (in this case at $22500). In other words, the employee contribution plus the match could not exceed the maximum.
Might want to check on that because he may have over-contributed. Hard to believe the payroll guys at the company would not have caught that but if it is a smaller company, who knows.

I don't think that is right. My last full year at work, I suspect I would have contributed maybe ~$55,000, or so, to my 401K that year. I looked up my old Megacorp benefits on-line for the calendar year 2023 and found the following limits for 2023.

- up to $22,500 max total employee contribution (401K or Roth 401K)
- another $7,500 for catrch up (over 50 years old).
- up to $33,000 max company contribution (10% of salary not really a match, but company didn't care if you contributed)
- $73,5000 max for total employee (pre and post-tax contributions), catch-up, and company contribution


I also see that the company match has to be pre-tax and not post tax (i.e. 401K Roth).

 

[tulak]

Are you sure those contribution numbers are correct? I have been FIREd for a while now and things may have changed but in the old days, the TOTAL contribution would have maxed out (in this case at $22500). In other words, the employee contribution plus the match could not exceed the maximum.
Might want to check on that because he may have over-contributed. Hard to believe the payroll guys at the company would not have caught that but if it is a smaller company, who knows.

This is not right. Employer contributions are in addition to the individual contribution. The total contribution limit is 66k for 2023. You can see how this is calculated at https://www.bogleheads.org/wiki/After-tax_401(k).

In the case of the OP, I would figure out how that $3675 was contributed.

With my 401k at Fidelity, I have only one account, but I can look at the individual contributions: pre-tax, company match, and after-tax. Maybe something similar is available with your son’s account?

 

[JBTX]

Are you sure those contribution numbers are correct? I have been FIREd for a while now and things may have changed but in the old days, the TOTAL contribution would have maxed out (in this case at $22500). In other words, the employee contribution plus the match could not exceed the maximum.
Might want to check on that because he may have over-contributed. Hard to believe the payroll guys at the company would not have caught that but if it is a smaller company, who knows.

At the risk of piling on, this isn’t right. My wife contributes the max to her 401k for 55+. In addition she gets an employer match.

 

[NgineER]

As far as a match being taxed at withdrawal, I seriously doubt that. How would anyone keep track of that. I doubt you could even use form 8606 for this. After all, this would run counter to the general mantra for Roth accounts that "all withdrawals are exempt from taxes".
My guess is that the match will be included on his W2 as some sort of taxable compensation

Unfortunately I think you are wrong on this point also. In my own experience the match is always in a traditional account regardless of your contributions are in a Roth. It is not hard for the company to keep track of. I think it is required by the IRS, but I’m not entirely sure about that.

 

[Gumby]

This Investopedia article goes into great detail regarding the employer 401k matching process, including limits and tax treatment. I never had a match of any kind, so I never had a need to know this.

https://www.investopedia.com/ask/answers/102714/are-roth-401k-plans-matched-employers.asp

 

[euro]

This is not right. Employer contributions are in addition to the individual contribution. The total contribution limit is 66k for 2023. You can see how this is calculated at https://www.bogleheads.org/wiki/After-tax_401(k).

In the case of the OP, I would figure out how that $3675 was contributed.

With my 401k at Fidelity, I have only one account, but I can look at the individual contributions: pre-tax, company match, and after-tax. Maybe something similar is available with your son’s account?

You may well be correct on all of these points. As I said, it's been a while since I contributed to 401ks and back then we only had traditional (not Roth) to work with. I do recall that had to carefully calculate and adjust the 401k withholding each month in order to get the full match because once the limit was reached the match stopped. Maybe that was just specific to my megacorp, or maybe the rules have changed in the meantime. Either way, sorry for the misleading comment

 

[gauss]

From the horse's mouth: aka IRS.gov

Can my employer match my designated Roth contributions? Must my employer allocate the matching contributions to a designated Roth account?

Yes, your employer can make matching contributions on your designated Roth contributions. However, your employer can only allocate your designated Roth contributions to your designated Roth account. Your employer must allocate any contributions to match designated Roth contributions into a pre-tax account, just like matching contributions on traditional, pre-tax elective contributions.

It sounds like the matching contributions will go into a traditional 401k and will be tax deferred until withdrawn.

-gauss

 

[gauss]

Apparently the IRS horse speaks out of both sides of its mouth.

A shoutout to Phroig #3 above for pointing out the SECURE 2.0 changes that allow for employer plans to adopt the new "Designated Roth Matching Contributions" rule.

A decent overview is here:

Prior to SECURE 2.0, 401(k) participants could only designate elective deferrals as Roth. Notice 2024-02 distinguishes these Roth contributions as “designated Roth elective contributions.” SECURE 2.0 allows participants to designate employer matching contributions and nonelective contributions as Roth contributions. Notice 2024-02 distinguishes these Roth contributions as “designated Roth matching contributions” and “designated Roth nonelective contributions.”

Any matching or nonelective contribution allowed by a 401(k) plan can be designated as Roth, including both safe harbor and discretionary contributions.

It looks like these new Designated Roth Matching Contributions will be taxable to the employee in the year that they are contributed by the employer.

Apparently we are in a year of transition and the IRS link I posted above in post #12 will likely need to change to accommodate these SECURE 2.0 provisions.

-gauss

 

[euro]

Apparently the IRS horse speaks out of both sides of its mouth.

... snip



It looks like these new Designated Roth Matching Contributions will be taxable to the employee in the year that they are contributed by the employer.


-gauss

That makes sense to me (see post #5). This way, taxes are paid on all Roth funds and nobody has to keep track of "taxed Roth" vs "untaxed Roth".

 

[Time2]

OP here, my son talked to HR about the where the match goes. They said it is put into a tIRA. Now I wonder if it is worth trying to get the employer to switch things over to meet the Secure 2.0 provisions.
After reading this, I still don't see when the tax is paid by the employee on the employers Match. But it seems his employer can switch it over to be a Roth Contribution. I see nothing in the write up about the tax to be paid.



https://www.employeefiduciary.com/blog/roth-matching-and-nonelective-contributions#:~:text=The%20SECURE%202.0%20Act%20of,could%20be
%20designated%20as%20Roth.


Any clarification would be helpful.


BTW, the Roth/401k is employer sponsored through Vanguard, but he can't find a breakout of Traditional 401k and Roth/401k, it all seems to be Roth.

 

[euro]

OP here, my son talked to HR about the where the match goes. They said it is put into a tIRA. Now I wonder if it is worth trying to get the employer to switch things over to meet the Secure 2.0 provisions.
After reading this, I still don't see when the tax is paid by the employee on the employers Match. But it seems his employer can switch it over to be a Roth Contribution. I see nothing in the write up about the tax to be paid.



https://www.employeefiduciary.com/blog/roth-matching-and-nonelective-contributions#:~:text=The%20SECURE%202.0%20Act%20of,could%20be
%20designated%20as%20Roth.


Any clarification would be helpful.


BTW, the Roth/401k is employer sponsored through Vanguard, but he can't find a breakout of Traditional 401k and Roth/401k, it all seems to be Roth.

Well, if the match goes into a traditional 401k then no taxes are due to be paid (they will be paid when that money is accessed), but that traditional 401k account has to exist somewhere where your son can see it (and determine investment choices).
If the match goes into the Roth 401k, then SOMEONE has to pay taxes. Theoretically, I suppose the employer could pick up that tab, but I HIGHLY doubt that they will. That match will simply be added as "additional salary" on the paystub in one way or the other. Just like, for example, certain insurance premiums the employer may pay on the employee's behalf.