Roth 401(k) plans are typically matched at the same rate as traditional 401(k) plans. However, with a Roth 401(k), the matching contributions provided by an employer are placed in a traditional 401(k), while employee contributions are held in the Roth 401(k).
- A Roth 401(k) is funded with post-tax dollars, while a 401(k) is funded using pretax income.
- Not all employers offer Roth 401(k) retirement vehicles, as administrative work for handling a Roth 40(k) may outweigh its benefits.
- With a Roth 401(k) you won’t be taxed on your investment returns at the time of withdrawal if you are 59½ years or older when you take money out of the account.
Traditional 401(k) vs. Roth 401(k)
A Roth 401(k) is an employer-sponsored investment account that’s similar to a traditional 401(k) plan, except the contributions to the account are taxed up front rather than at the time of withdrawal. It is well suited to people who expect to be in a high tax bracket when they retire and thus want to avoid paying taxes on their investment returns.
A traditional 401(k) is also an employer-sponsored retirement savings and investment account. Employers and employees both make contributions to a 401(k) on an elective basis. Employers may choose to match an employee’s contributions, up to a certain point. The money is then invested in various securities and mutual funds to grow until it is withdrawn after retirement.
Traditional 401(k) contributions are made with pretax dollars. This means that more money goes in right at the start, giving you a bigger amount to invest. The contributions are also tax-deductible at the time they are made, so they might move you to a lower tax bracket. That is something to consider, especially if you are on the cusp. When the funds are withdrawn, however, you pay taxes on both your initial investment and your investment returns that have accumulated over the years.
The Roth 401(k) prevents you from being taxed on your investment returns at the time of withdrawal, as long as the withdrawal happens once you are 59½ years old or older. That is allowed because your contributions are made after the money is taxed. The downside of this is that it gives you a smaller investment pot with which to work.
Contribution limits are the same for both traditional and Roth 401(k)s. For 2022, employees can contribute up to $20,500 to 401(k) accounts, with an additional catch-up contribution of $6,500 allowed for those aged 50 and over. The combined limit for employee and employer contributions for 2022 is the lesser of $61,000 or 100% of the employee’s compensation. For those 50 and older, the limit is $67,500 ($61,000 + $6,500).
The limits increase in 2023 to account for inflation. For 2023, employees can contribute up to $22,500 to 401(k) accounts, with an additional catch-up contribution of $7,500 allowed for those aged 50 and over. The combined limit for employee and employer contributions for 2023 is the lesser of $66,000 or 100% of the employee’s compensation. For those 50 and older, the limit is $73,500 ($66,000 + $7,500).
It is important to note that a traditional 401(k) plan can be rolled into a Roth 401(k) plan (although you will pay taxes on the amount rolled over). However, once funds from any source are in the Roth 401(k) plan, they cannot be moved into a traditional 401(k) plan. They can be rolled over to a Roth IRA, though.
While you can roll over funds from a traditional 401(k) to a Roth 401(k), the converse is not possible. Once money is put into a Roth 401(k), from any source whatever, it cannot be rolled over into a traditional 401(k).
If an employer matches a traditional 401(k) plan contribution, it’s standard for it to also offer a Roth 401(k) match, but only if the company offers a Roth 401(k) in the first place. Unlike the employee’s contribution, the employer’s contribution is placed into a traditional 401(k) plan, and it’s taxable upon withdrawal. Because of this, many employers have found that the additional administrative demands of a matching Roth 401(k) outweigh the benefits to their employees and as a result don’t offer one.
There are two key types of employer matching: dollar-for-dollar and partial.
Dollar-for-dollar matching is just as it sounds. The employer will match 100% of your contributions, generally up to a certain percentage of your salary. For example, if you choose to contribute 4% of your salary to a 401(k), your employer will match that exact amount.
Partial matching is when your employer will match part of your contribution, such as 50% (usually up to a percentage of your salary). For example, if you choose to contribute 4% of your salary to your 401(k), your employer would match 50% of that (assuming it’s under the contribution limit).
Is Employer Roth 401(k) Matching Taxable?
No. The employer’s matching contribution for Roth 401(k) holders is made to a traditional 401(k). Thus, matching contributions are made on a pretax basis.
Does Your Employer Match Count Toward the Roth 401(k) Limit?
No. Employer matches don’t count toward the employee contribution limit, which is $20,500 for 2022 and $22,500 for 2023 (plus a catch-up contribution for those aged 50 or older of $6,500 in 2022 and $7,500 in 2023). However, they do count toward the combined (employer plus employee) contribution limit, which is $61,000 for 2022 and $66,000 for 2023 (plus the same catch-up contribution).
How Are Roth 401(k) Contributions Calculated on Your Paycheck?
Your Roth 401(k) contribution will show up as a line item on your pay stub that reduces your after-tax income.
The Bottom Line
When an employer makes matching contributions to a traditional 401(k) plan, the contributions go directly into that plan. However, when an employer makes matching contributions to a Roth 401(k), they must be deposited in a separate, traditional 401(k), meaning that unlike the funds in the Roth 401(k), they will be taxed by the IRS when you withdraw them in retirement. For this reason, many employers choose not to offer a Roth 401(k) plan option at all, feeling that the additional administrative demands outweigh the benefits.