Many employers now offer employees the option to contribute to a Roth 401(k) as well as a traditional 401(k). Roth 401(k) plan contributions won’t affect your income tax withholding, but the amount that you elect to contribute to the plan will affect your take-home pay. Knowing how much will be withheld for your Roth 401(k) plan contributions helps you budget better because you know how much you’ll get to keep each pay period.
Calculating Roth 401(k) Withholding
To figure the amount that your employer will withhold to contribute to your Roth 401(k) account, you need to know your gross pay per pay period and the amount of your income you’ve designated to contribute to your Roth 401(k).
- First, divide your annual salary by the number of pay periods per year to calculate your gross income per pay period.
- Second, multiply your gross income per pay period by the percentage you’ve elected to contribute to your Roth 401(k) plan to determine your 401(k) plan withholding.
For example, say you are paid monthly, your annual salary is $72,000, and you elect to contribute 5 percent to your Roth 401(k) plan. Divide $72,000 by 12 to find your monthly gross income is $6,000. Second, multiply $6,000 by 0.05 to find that your 401(k) withholding is $300 per month.
Employer Matching Contributions
Your employer may offer matching contributions for your 401(k) plan and is permitted to calculate the amount of the matching contributions based on the amount you contribute to your Roth 401(k) account. However, your employer is required to contribute that matching amount to a traditional 401(k) account and can’t simply add that money to your Roth 401(k) on top of your contributions.
Tax Effects of Roth 401(k) Withholding
Unlike contributions to a traditional 401(k) plan, your Roth 401(k) plan won’t have any impact on your income tax withholding for the year. This is because your Roth 401(k) plan contributions are made with after-tax dollars, rather than pretax dollars, so you don’t receive a reduction in your taxable income for your contributions.
However, the money still grows tax-free while it remains in the Roth 401(k) account. In addition, when you take qualified distributions from your Roth 401(k) plan in retirement, all of the money, including any earnings on the contributions, comes out tax-free.
The Roth 401(k) contribution limits are cumulative with your traditional 401(k) contributions and cannot exceed $19,000 as of 2019. If you’re 50 or older, you can make an additional catch-up contribution of $6,000. For example, if you’re 55 in 2019 and you contribute $10,000 to your traditional 401(k), you can’t contribute more than $15,000 to your Roth 401(k).
- Once you arrive at the maximum that the IRS allows you to contribute toward a Roth 401(k) for the year, your employer stops the withholding and resumes it at the start of the next year.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."