Enacted in 2022, Secure 2.0 brought about significant changes for retirement savers, including the option for employers to offer 401(k) match contributions in Roth accounts. These accounts are after-tax, meaning employees pay taxes upfront but enjoy tax-free growth and withdrawals in retirement. While roughly 12% of employers have already added this feature and 37% are considering it, experts warn that these new matching Roth contributions could lead to unexpected tax implications at the end of the year. Tommy Lucas, a certified financial planner, explains that taking the match as a Roth increases adjusted gross income, resulting in extra income that is not automatically taxed. This means employees could face additional tax liabilities on top of state income taxes, depending on where they live.
For those who have chosen to receive their company’s Roth matches in 2024, it is essential to plan for the extra income. Jim Guarino, a certified financial planner and managing director at Baker Newman Noyes, advises individuals to increase federal and state withholdings with their employer or boost quarterly estimated tax payments. For example, if an individual expects to owe an extra $1,320 in federal taxes due to their Roth match, they can divide that amount by their remaining paychecks in 2024 and include the additional withholding on Form W-4 with their employer. It is crucial to ensure that these changes are correctly reflected on future paychecks to avoid any surprises come tax time. Guarino recommends working with a trusted tax advisor to optimize overall tax planning and reporting for the year, especially when dealing with complex retirement contributions like Roth 401(k) matches.
The shift towards Roth 401(k) matches presents a change in the tax landscape for retirement savers, requiring careful planning to avoid being caught off guard with unexpected tax liabilities. While the tax benefits of Roth accounts are attractive for long-term growth and tax-free withdrawals in retirement, the immediate tax consequences of Roth contributions must be considered. With traditional 401(k) matches, contributions are typically made on a pretax basis, reducing taxable income upfront. However, the after-tax nature of Roth contributions means that employees may face higher tax liabilities in the present year, particularly if they are in a higher tax bracket.
Understanding the implications of receiving Roth 401(k) matches is crucial for individuals planning their retirement savings strategy. By receiving Roth contributions, employees effectively increase their adjusted gross income, potentially leading to higher tax liabilities at the end of the year. These additional taxes must be accounted for and planned for in advance to avoid any surprises. Working closely with a tax advisor can help individuals optimize their tax planning and reporting for the year, ensuring that they are making informed decisions when it comes to their retirement contributions.
Incorporating Roth 401(k) matches into your retirement savings strategy can offer long-term benefits, such as tax-free growth and withdrawals in retirement. However, it is essential to understand the immediate tax implications of these contributions and plan accordingly to avoid any surprises come tax time. By taking proactive steps, such as increasing federal and state withholdings or adjusting quarterly estimated tax payments, individuals can effectively manage the extra income generated by Roth matches. Consulting with a tax advisor can provide valuable insights and guidance on how to optimize tax planning and reporting for the year, especially when dealing with complex retirement contributions such as Roth 401(k) matches. By being proactive and informed, individuals can make the most of their retirement savings while minimizing tax liabilities along the way.
Overall, the introduction of Roth 401(k) matches under Secure 2.0 has changed the retirement savings landscape, offering new opportunities for employees to save for retirement tax-efficiently. However, these changes also come with potential tax implications that individuals need to be aware of and plan for accordingly. By understanding how Roth contributions impact taxable income and taking proactive steps to manage the tax consequences, individuals can ensure that they are making the most of their retirement savings while staying on top of their tax obligations. Working with a trusted tax advisor can provide valuable guidance and support in navigating the complexities of Roth 401(k) matches and optimizing tax planning strategies for the year.
