26-04-2025
Why your Roth 401(k) match from work doesn't go into a tax-free account yet
If you are all in on Roths, it might be a little vexing to you that your employer is not.
More than 82% of large employers offer a Roth 401(k) option to employees, which means workers can pay tax now on their income and sock away their savings tax-free for the rest of their life. But only 0.1% of companies are buying into the new feature in the Secure 2.0 legislation that allows employers to put matching contributions into Roth accounts rather than traditional pretax 401(k) funds, according to a new report from Mercer.
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That means that if you are among the 17% of workers who contribute to a workplace Roth 401(k), according to Vanguard, you will still collect a small pile of pretax funds in a separate account at your employer's retirement custodian. If you look at your account statement, you'll likely see these as different line items, or buckets, labeled something like 'employee Roth contributions' and 'employer matching' or 'Safe Harbor match,' depending on the financial institution. The money is still yours — it's just separated for recordkeeping purposes. Workers only need to keep track in order to do tax planning for retirement.
Employers aren't ignoring all the new features allowed by Secure 2.0. Some 74% are clamoring to increase the involuntary cash-out amount for employees, according to Mercer, so they can get more low-balance retirement accounts off their systems. And 10% of companies want to make it easier for employees to take out money before age 59½ to cover the costs of terminal illnesses without penalty — but only 6% want to make that benefit available to victims of domestic violence and only 1.2% want to make penalty-free withdrawals available for general emergencies.
Employer Roth 401(k) matching may be one of those ideas that is better in theory than in practice.
'There are a few complexities on the back end that have made it administratively difficult for providers to roll out. So for the most part, this is in the no-go area still,' said Jamie Hopkins, chief wealth officer at Bryn Mawr Trust.
The problems stem mostly from the tax considerations of a Roth account, which is easier to manage from the employee side than the company side. To make a Roth 401(k) contribution, an employee simply pays the tax on their income in the current year, and then the money grows tax free while it's in the Roth account.
On the company side, however, that match counts as an expense to the company and as income for the employee, and it involves a lot of coordination to get all of it properly accounted for.
'This is a very complex optional provision,' said Holly Verdeyen, defined-contribution leader at Mercer, a workplace-benefit consulting firm. 'It requires coordination between different vendors — the plan, their trustee, their payroll provider and plan recordkeepers.'
Rich Schainker, director of retirement and investments at WTW, another workplace-benefit consultant, said that the potential tax implications for employees is another reason for the slow adoption.
'Employers may be cautious about introducing features that require significant changes to plan administration and employee education,' he said. 'Overall, while Roth features continue to gain traction, the specific adoption of Roth matching contributions remains limited as employers weigh the benefits against the administrative and educational efforts required.'
Still another hurdle Schainker mentioned is that employers are tied up at the moment implementing other Secure 2.0 provisions, specifically those that require high-income older earners to put catch-up contributions into Roth accounts and those that allow new 'super' catch-up contributions for people between the ages of 60 and 63, who can put away a total of $11,250 in 2025 on top of the regular employee deferral limit of $23,500.
There comes a time for many highly compensated people when they realize they've saved too much — at least in tax-deferred accounts.
Socking away money for retirement in a 401(k) is a fantastic benefit, but once you hit 73, you have to start taking money out and paying tax on it. Those required minimum distributions stress out a lot of people, especially when their account balances reach $1 million and the amount they must take out each year tips them into a higher tax bracket or forces them to pay IRMAA surcharges on their Medicare premiums.
This is why people start to scramble in their early 60s to do Roth conversions, paying the tax in chunks ahead of time and shifting that money into these tax-free-forever accounts.
If you figure out this math early enough, you can start diverting your retirement savings into a Roth 401(k) directly. It's a smart move, especially if you're above the income limit to contribute to a non-workplace Roth IRA — which is $150,000 for a single person in 2025 — and you want to contribute more than the $7,000 allowed.
If you're a very high earner and you want to sock away even more than you're allowed to as an employee, at many companies you can make after-tax 401(k) contributions and then immediately roll them over into a Roth 401(k) account, up to the total annual limit for retirement savings set by the IRS (which in 2025 is $70,000 for those under 50, and $77,500 with catch-ups).
'In-plan Roth conversions allow employees to convert their traditional 401(k) balances to Roth balances, providing the same tax advantages without the need for immediate implementation of new matching features,' Schainker said.
But that's still all about your money and what you contribute. For the time being, it seems that company matching funds will stay in the tax-deferred universe, and employees will pay tax on those funds when they withdraw them in retirement.
'Likely, we will see more plans open this up next year,' predicted Hopkins. But given that there are still tax considerations to work out, 'without likely guidance this year from the government, it could hinder the adviser and plan sponsor support of adoption for a few years.'
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