Are employer contributions to a Roth 401k taxable?
I recommended to one of my clients that he takes advantage of his Roth 401k at work. His employer matches his contributions – up to 7% – into his 401k, regardless of whether or not he elects the Roth 401k or the Traditional 401k. His question, that I had no idea how to answer, was whether or not employer contributions into a Roth 401k will be taxable at any point? And if so, would it be at withdrawal (which would be contrary to the point of Roth vehicles)? Or, since Roth contributions are usually made after tax, would the employer contributions be considered compensation and be taxed as ordinary income in the year that they were made to the account? I would have to think that the IRS would get their taxes on employer contributions to a Roth 401k at some point.
Permalink Submitted by Alan Spross on Tue, 2010-11-09 19:19
Employer matching contributions always go to the pre tax account, never to the Roth account, so they will obviously be taxable at some point. The Roth account can only hold the actual employee deferrals, gains on those deferrals and starting very soon in plan conversions from the pre tax account to the designated Roth account.
While the Roth option would be more attractive if the match also went to that account, the fact that it does not means that even if client opted 100% for Roth contributions, he would still be getting considerable pre tax account growth from the matching contributions, so if you are aiming for a target Roth vrs pre tax balance, he would have to increase the portion of his deferral to the Roth to get there. Most plans allow just about any allocation between the pre tax and Roth options, and also a chance to frequently change the %s.