Retirement Savings and Benefits
Questions and comments about IRAs, 401k accounts, social security, and other forms of retirement savings and benefits.
Employer matching in a Roth 401k
Posted by: pacital, February 13, 2012 05:18AM
I am contemplating enrolling in my company's Roth 401K. They offer matching, so I'm wondering who pays the tax on the amount that the employer contributes? Me or the employer?

Re: Employer matching in a Roth 401k
Posted by: Bill Brown, February 13, 2012 05:53AM
The employer gets an immediate tax deduction. If you wait long enough, you make withdrawals without paying income tax.

Re: Employer matching in a Roth 401k
Posted by: frugalNOTcheap, February 13, 2012 06:35AM
The employee pays the tax on the employer match at withdrawl. Here a link to an article that dicusses this:

[www.smartmoney.com]

2. What happens to the employer match?
Employer matches are made with pretax dollars, and the match accumulates in a separate account that is taxed as ordinary income at withdrawal.

Re: Employer matching in a Roth 401k
Posted by: Bill Brown, February 13, 2012 02:51PM
Frugal is correct. My bad.

My guess is the extra administrative costs of the Roth 401(k) make them unattractive to many employers. Anyone have any idea how many employers offer Roth 401s to their employees?

Re: Employer matching in a Roth 401k
Posted by: pacital, February 13, 2012 03:38PM
OK, so the employer match should be treated like a traditional 401K then. I take it that it's all transparent and you don't actually see 2 accounts. And if you were to leave the company and roll it over to a Roth IRA, they'd still have the money in different accounts behind the scenes?

Re: Employer matching in a Roth 401k
Posted by: joetaxpayer, February 13, 2012 04:49PM
You do see 2 accounts. If you only have a Roth 401(k), the match will need a Traditional 401(k) to accept deposits.

[www.joetaxpayer.com]

Re: Employer matching in a Roth 401k
Posted by: Alan S., February 13, 2012 07:26PM
Joe is correct. A plan must always set up a pre tax 401k account in order to be able to offer a designated Roth option.

The amount you actually defer to the designated Roth will be included in your Box 1 W-2 income and you will be taxed on it as salary income. The company match is tax deferred for you and is treated the same way as the employer match had you selected pre tax 401k deferrals instead of the Roth option.

When you leave the company, you may have the option to transfer these accounts to your new employer. But more common would be a rollover of the designated Roth balance to your Roth IRA and the pre tax balance from company matching to your TIRA. In other words, the only designated Roth earnings in the account will come from earnings on your actual deferrals.

More than likely you could also opt to split your deferral amounts between the Roth and pre tax accounts in any combination you wish, but the company match always goes into the pre tax account.



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