RETIREMENT
to pay now, at a lower rate, in exchange for tax-free withdrawals later, when their taxes are likely to be higher.
What they and their advisors might not have figured on is the additional income tax due on the employer’ s additions to the Roth 401( k). Even many plan sponsors remain unaware of this, says Eric Ludwig, CEO of Stockbridge Private Wealth Management in Sun Prairie, Wis., and director of the American College of Financial Services’ Center for Retirement Income.
“ Almost no one has actually encountered it,” he says.“ I called my own plan recordkeeper today, and the representative told me he had never heard of the employer
To the IRS, employer additions to a Roth 401( k) count as extra compensation to the employee— that is, as taxable income.
match going to a Roth account.”
If the people administering these plans are not yet familiar with the provision, he continues, it is safe to say that very few workers, if any, are actually receiving tax notices.“ The infrastructure is not there yet,” he says.“ Most recordkeepers have not operationalized this feature, [ and ] most plan sponsors have not amended their plans to offer it.”
But that may soon change. Plans have until the end of this year to implement the option, he says.
Part of the confusion may be that all deposits to a traditional 401( k) are pretax and therefore reduce the employee’ s currentyear taxable income( those include contributions from both the employer and employee, and they’ re limited to $ 72,000 a year for most workers in 2026, $ 24,500 of which can come from the employee). But Roth 401( k) contributions can come in two types. What the employee puts in is after-tax and therefore has no immediate tax implications. The employer’ s matching contributions to the Roth 401( k), however, are pretax, so they add to the worker’ s currentyear taxable income.
What should clients who face this situation do to cushion the blow? One idea is to
adjust their W-4 withholdings accordingly. Another is to make estimated tax payments to get ahead of the tax liability. Or, if they anticipate an unusually high income tax bill in a particular year, they can temporarily forgo the employer’ s contributions to the Roth.
“ If you’ re new to making Roth 401( k) contributions, be aware that your taxable income is going to be higher— and prepare to get less of a refund,” says Kelly Regan, a vice president at Girard, a Univest Wealth division in King of Prussia, Pa.
Nothing is ever quite that simple, though.
A further complication involves tax timing. Most 401( k) contributions can be made until the tax-filing day of the following year; that is, if you make a contribution on or before April 15, 2027, say, it can still count toward the 2026 tax year. Not so for an employer’ s matching contributions to Roth 401( k) s. They are taxed in the same calendar year they are made. If it’ s April 15, 2027, it will be taxable with the employee’ s 2027 income taxes. The IRS treats the contribution as extra compensation for the calendar year it was actually added to the employee’ s account.
“ It’ s important to be aware of the timing of contributions so the employee can control their tax bill,” says Regan.
( Note that the employer may be on a different tax calendar. Many companies use a fiscal year that doesn’ t line up with the calendar year. Consequently, the employer’ s matching contribution to a Roth 401( k) may be recorded in one fiscal year for the employer and in another for the employee.)
These complications may soon involve more and more of your clients, analysts say. Starting this year, catch-up contributions to workplace retirement accounts must go to a Roth option. So workers who are 50 or older and had FICA wages of at least $ 150,000 last year( the amount will increase annually)— and who want to make catch-up contributions to a 401( k) before they retire— will have to make them to a Roth 401( k). The catch-up maximum for workers between 50 and 59 is $ 8,000 this year, or $ 11,250 for those between 60 and 63.
This new requirement is forcing more employers to implement a Roth infrastructure into their retirement plans, which in turn may cause more companies to start issuing 1099-Rs for Roth 401( k) employer matching contributions.
“ Once that plumbing is in place, the optional Roth treatment of employer contributions becomes a much shorter step for plan sponsors to take,” says Ludwig.“ As more plans adopt the Roth employer contribution option, participants will start receiving what looks like a distribution notice for money they never took out of the plan. That is going to generate a lot of confused phone calls to advisors and tax preparers.”
50 | FINANCIAL ADVISOR MAGAZINE | SEPTEMBER / OCTOBER 2026 WWW. FA-MAG. COM