Roth 401(k) Match: Unexpected Tax Surprise

0:00This is Cory with the story, here with your quick two-minute update from Durham News today. Many people chose Rothtreeman for their employer's 401k match to get tax-free growth in retirement. But now, tax time brings a shock. A form 109-9R shows income they never touched. This means owing taxes right away on those contributions, even though the money stays in the account. The Kier 2.0 Act, Effective Lay 2022, lets employers put matches into Roth accounts. The catch is the IRS sees it as an in-plan Roth rollover, so they issue that form with a gross distribution code. It reports the full amount as taxable for the year it's allocated. Workers are caught off guard, facing unexpected bills without any tax withholding from the contributions. For example, a $5,000 match at a 22% rate means an extra $1,100 due from your pocket. Small business owners with SEP or simple IRAs get similar treatment, like an instant conversion.

1:03Timing adds another wrinkle, as deposits can happen after the plan year ends, shifting the tax to a later return. Full vesting is required to elect Roth, and not all plans offer it. This is led to confusion for tax preparers who might mistake it for an early withdrawal penalty. If you've elected it, review statements, set aside cash for taxes, and alert your preparer early. Before choosing, check eligibility and crunch numbers with an advisor. Younger folks in low brackets might gain most from the long term tax-free withdrawals. A message from our sponsors supports today's story. It looks like a pillow. It sounds like headphones built for comfort and sound. S-O-L-I-SoliPillow.com Made in AI