Roth 401k Employer Match Question

[thisisbrianly]

Hey everyone,

I just found out that my new employer offers a Roth 401k program and had a question about the employer matches.

So I understand that they take post-tax income to be put into the account and the matches go into a traditional account.....my question is this: is that match based on the gross income or the taxed contribution?

For example:

Monthly Gross Income: 4000
Income After Taxes: 2500
After Tax Contribution to Roth 401K: 2500

Would my employer match be based on the 2500 after tax income or the 4000 pre-tax income?

I'm assuming pre-tax since its going into a traditional, but just wanted to make sure.

Thanks!

[kv968]

That's a good question. I would imagine they'd match the percentage of your contribution before taxes. It wouldn't be your 2500 after-tax income or the 4000 pre-tax income. It would be based on your gross income of that 2500.

For example, say you're in the 25% tax bracket and that after-tax $2500 is really $3125 pre-tax. The company would match you on the $3125.

I had to really think about that one and I'm not sure I'm right but I think that's the way it would go. I'm sure if there's others who know or disagree, they'll let me and you know

[LuxLiving]

Whether this is correct or not, I'm unsure, but since we were just talking about David Bach's Automatic Millionaire book over on another thread, I've got that book in my hands and on page 85 he gives the following example:

401-K Retirement Plan (Pre-Tax With Employer Match)

Gross Income 1.00
Minus taxes -.00
_______________
Amount available to invest $1.00
Typical empl. match +25%
__________________________
Amount invested $1.25
plus annual return +10%
___________________________
Balance after one year $1.38
Gains taxable? No

From this it appears the match is paid on the gross income figure.

Fact or not? Someone else with more knowledge will have to chime in!!

[carsensejoe]

thats something you have to find out from your employer---but im betting 2500

[jIM_Ohio]

funny math. You are splitting hairs because you have not looked at the math.

Employer contributions are post tax, as stated, and 401k contributions are based on % of gross income (whether Roth or Traditional).

In example given

4k gross income... this is amount used for everything.

You contribute 10% to 401k... it is 10% of the 4000 ($400). Adjust % as needed, but the math is still the same, just change the numbers.
Your employer matches (say 50% of first 6%- this is what my match is), so company is matching 3% of 4000 as well ($120).

The $400 is taxed for Roth, not taxed for traditional.
The $120 is not taxed in either case.

next question.

[zetta]

The traditional matching I've seen is based on matching your actual contribution, not matching a percentage of your gross income. If you have a 50% match up to 6%, it just means that the employer will put in half as much as you contribute, but will cap the match.

So for the example above:

Gross income: $4,000
0% contribution: $0 match: $0
2% contribution: $80 match: $40
4% contribution: $160 match: $80
6% contribution: $240 match: $120
8% contribution: $320 match: $120
10% contribution:$400 match: $120

If I had to guess, the ROTH vs traditional just affects the amount you pay in taxes. So for with ROTH 401k, you would pay say $1,000 in taxes regardless of how much you contribute, where with the traditional, your taxes go down as you contribute more. (I'm using 25% to figure the taxes just to make the calculation simple.)

Gross income: $4,000
0% contrib: $0 taxes w/ROTH: $1,000 taxes w/trad: $1,000
2% contrib: $80 taxes w/ROTH: $1,000 taxes w/trad: $980
4% contrib: $160 taxes w/ROTH: $1,000 taxes w/trad: $960
6% contrib: $240 taxes w/ROTH: $1,000 taxes w/trad: $940
8% contrib: $320 taxes w/ROTH: $1,000 taxes w/trad: $920
10% contrib:$400 taxes w/ROTH: $1,000 taxes w/trad: $900

I'm not an accountant, though, so perhaps a payroll person can correct me if I'm wrong on this.

[puck36]

What happens to the employer match?
Employer matches will still be made with pretax dollars, and the match will accumulate in a separate account that will be taxed as ordinary income at withdrawal.

Introducing the Roth 401(k) (Retirement: Personal Finance) | SmartMoney.com