Beware Roth 401(k) Matches' Tax Consequences: Jamie Hopkins

What You Need to Know

Under the Secure 2.0 Act, savers can direct matching contributions to Roth accounts if their employer allows.
These matching contributions will not show up as income on the worker's W-2 but on a 1099-R form.
Workers generally have two options for paying taxes owed on employer contributions.

Workers saving for retirement have the potential to direct their employer’s matching contributions into Roth 401(k) accounts, thanks to the Secure 2.0 Act, but they must be aware of the tax payment and reporting consequences.

This is the message shared by Jamie Hopkins, the financial planning expert and chief wealth officer at WSFS Bank, in a new video posted to LinkedIn.

In the video, Hopkins addresses the recently published IRS Notice 2024-2, which in addition to clarifying the tax treatment of employer-matching Roth contributions also speaks to such topics as the expansion of automatic enrollment and the creation of new startup plan tax credits for small businesses.

Relatively few employers have adopted plan provisions permitting savers to direct their matching contributions to Roth-style accounts, Hopkins noted, but that will likely change in the months and years ahead. So, it’s important for everyone to get up to speed on the strategy’s tax consequences.

Mind the W-2

As Hopkins explained, the management of tax obligations with respect to employee contributions to a Roth-style account is straightforward.

“It shows up in your W-2 as income, and it’s coming in after taxes,” Hopkins said. “Now, with the employer Roth contributions, in a matching situation, it does not show up in [the worker’s] W-2.”

Just because the tax burden isn’t on the W-2, however, doesn’t mean it somehow disappears, Hopkins warned.

“So, where does this show up? How are we going to deal with it from a tax perspective if we’re talking to clients?” Hopkins asked. “You’re going to get a 1099-R if you’re getting employer matches into your Roth account at a company.”

What to Know About 1099-R

Workers may not be used to getting a 1099-R, Hopkins said, but the important part of the form to track in this context is Box 7, Code G. This will show the dollar amount that a client must pull into ordinary income.

How to Pay the Tax

“Now, how do you actually end up paying this?” Hopkins asked. “Two different ways.”

The first option is to report the income when filing annual income taxes.

“It’s included as your income, and you pay the additional taxes at that time,” Hopkins explained.

The second option is to increase federal withholdings by filing a W-4 with the necessary clarifying information.

“Here’s the challenge for individuals,” Hopkins said. “All this being the case, you’re going to have individuals with a surprise income tax bill who didn’t know that the company wasn’t withholding taxes when they signed up for that Roth 401(k) employer match. It could be a very big surprise for people. Definitely something to watch out for.”