Do companies match Roth 401K?
While it is common for employers to match 401(k) contributions, there is a perception that employers do not match Roth 401(k) contributions. Find out whether employers match Roth 401(k) contributions.
If your employer offers a 401(k) match, it means they will add funds to your 401(k) to match the contributions you make. Typically, the employer contributions can be matched partially or fully up to a specific percentage of your pay. While employer matching contributions are common for traditional 401(k)s, there are different perceptions on Roth 401(k) matching.
A company can make matching contributions to an employee’s designated Roth 401(k) account. As long as the company offers a match, you will get a company match at the same rate that the employer matches traditional 401(k) contributions. However, the employer will add the matching contributions to a separate pre-tax 401(k) account, and not to the Roth 401(k) account.
Traditional 401(k) vs. Roth 401(k)
Both traditional 401(k) and Roth 401(k) are employer-sponsored retirement plans, and they allow employees to make elective deferrals for retirement. The employer can match employees’ contributions to the 401(k) up to a certain threshold.
Usually, when you contribute to a traditional 401(k), the contributions are not taxed up front. Instead, the money grows tax-deferred, and you only pay taxes when you withdraw money from the 401(k). The 401(k) contributions are tax-deductible, meaning the contributions are not taxed, and they can push you to a lower tax bracket.
A Roth 401(k) is a retirement plan that incorporates the features of a pre-tax 401(k) and Roth IRA. Contributions to a Roth 401(k) are made post-tax, meaning it is taxed upfront so that the money will grow tax-free, and you won’t pay tax when you withdraw money in retirement. As long as you are 59 ½ or older, and the Roth account is at least 5 years old, you won't pay tax on both the contributions and earnings from investments.
Employer’s Match for a Roth 401(k)
If you have a Roth 401(k), the employer may match your retirement contributions at the same rate as a traditional 401(k). However, matching contributions to a Roth 401(k) must be placed in a separate pre-tax 401(k). This is because the IRS requires retirement savers to pay taxes on employer contributions when the funds are withdrawn. The employee’s contributions will still go to the Roth 401(k) account.
Most employers find the administrative rules of a Roth 401(k) demanding, and therefore, they decide not to offer these accounts. This explains the misconception that employers do not match Roth 401(k) contributions. The truth is, employers do match Roth 401(k) contributions, but these contributions are placed in a separate traditional 401(k) account.
How Employer matches Work
If your employer offers a match, they will add funds into your retirement account to match your contribution. However, matching contributions are voluntary, and some employers may decide not to offer a 401(k) match. Companies that offer matching contributions offer this benefit to retain top talent and build a robust employee base.
Employers can match contributions in the following two ways:
If your employer offers a partial match, it means the company will match a portion of your contributions, up to a certain limit. The most commonly offered partial match is $0.50 for every dollar for the first 6% of the salary an employee contributes.
For example, if you earn $100,000 per year, and you contribute 6% of your salary to a Roth 401(k), it means you contribute $6,000. If the employer matches $0.50 of every dollar you contribute up to 6% of your salary, they will add $3,000 to a separate pre-tax 401(k). This brings the total annual retirement contributions to $9,000.
Dollar-for dollar match
With dollar-for-dollar matching, the employer contributes an amount equal to what an employee contributes to the retirement account up to a specific percentage of the employee’s salary. The most common dollar-for-dollar matching is 100% match up to 3% of the employee’s salary.
For example, if an employee earns $100,000, and contributes 3% of his/her salary to Roth 401(k) i.e. $3,000, the employer will add an amount equal to the employee’s contribution i.e. $3000, hence bringing the total contribution to $6,000.
IRS Limit for Roth 401(k) Contributions
The IRS limits contributions to a designated Roth 401(k) account to $20,500 and $19,500 in 2022 and 2021 respectively. Retirement savers can make catch-up contributions of $6,500, raising the total contributions to $27,000 and $26,000 for the two years.
If the employer offers a match, the annual limit for the employer's contributions and employee's elective deferrals is $61,000 in 2022 or 100% of compensation, or $58,000 in 2021 or 100% of compensation. Employees age 50 or older can contribute up to $67,500 in 2022, or $64,500 in 2021. The matching contributions are always tax-deferred and added to a separate pre-tax 401(k) account.