401k Employer match question

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birdec
Posts: 31
Joined: Fri Jul 11, 2014 10:44 am

401k Employer match question

Post by birdec » Sat Oct 14, 2017 2:19 pm

I think I've made a horrible mistake and am hoping someone can confirm it. I'm contributing after-tax dollars to a Roth 401k and my employer is contributing pre-tax dollars (4% match). Because I'm contributing less absolute dollars every month because it's getting taxed (I realize it grows tax-free) my employer is matching a smaller amount than if I would've elected to contribute pre-tax money. If I switch to contributing pre-tax dollars my employer would match that higher dollar amount, right?

Secondly, I moved to a state with no income tax several months ago (I work remotely) but my dollar contribution amounts haven't changed. Because I am contributing after-tax dollars, shouldn't my contribution be higher since I'm no longer paying state income tax?

DSInvestor
Posts: 10625
Joined: Sat Oct 04, 2008 11:42 am

Re: 401k Employer match question

Post by DSInvestor » Sat Oct 14, 2017 2:27 pm

Moving to a state with no income tax will have no impact on the amount of your 401k contributions. It will affect your take home pay as you will no longer have state income taxes withheld. The eliminated state income tax liability going forward may allow you to afford to make larger 401k and/or IRA contributions. I would note that you may have paid extra state income tax to your old state because you made Roth 401k contributions. I believe that for most states, Traditional 401k contributions will reduce both fed and state tax liability.

IMO, a good default plan is to max out Traditional 401k and Roth IRA. This gives you some Roth space in IRA without having to give up tax breaks for Traditional 401k contributions. If you're married, your spouse can also make Roth IRA contributions even if he/she has no compensation if you file married filing jointly.

WL2034
Posts: 457
Joined: Tue May 21, 2013 10:36 pm

Re: 401k Employer match question

Post by WL2034 » Sat Oct 14, 2017 2:36 pm

birdec wrote:
Sat Oct 14, 2017 2:19 pm
I think I've made a horrible mistake and am hoping someone can confirm it. I'm contributing after-tax dollars to a Roth 401k and my employer is contributing pre-tax dollars (4% match). Because I'm contributing less absolute dollars every month because it's getting taxed (I realize it grows tax-free) my employer is matching a smaller amount than if I would've elected to contribute pre-tax money. If I switch to contributing pre-tax dollars my employer would match that higher dollar amount, right?

Secondly, I moved to a state with no income tax several months ago (I work remotely) but my dollar contribution amounts haven't changed. Because I am contributing after-tax dollars, shouldn't my contribution be higher since I'm no longer paying state income tax?
Perhaps you can post your pay stub (feel free to change the numbers), but the way my employer match works would not change based on what you are describing. My employer matches a certain percentage of my gross salary into a traditional (pre-tax) 401k.

So if my match is 4% and my gross pay is $100 in a pay period, my employer match is $4 for the pay period. It is based on gross pay and it is pre-tax, so it has nothing to do with whether I contribute roth or traditional. I just need to set my contribution to 4% or greater to receive the full match.

CppCoder
Posts: 661
Joined: Sat Jan 23, 2016 9:16 pm

Re: 401k Employer match question

Post by CppCoder » Sat Oct 14, 2017 2:39 pm

This is a matter of perspective. Suppose you are in the 25% tax bracket. If you want to contribute $7,500 to your 401k, for your Roth, you must have $10,000 in salary to make that contribution ($7.5k to the 401k and $10k to taxes), but for your pretax, you only need $7,000 in salary ($7k to the 401k and $0 in taxes). Either way, your company will contribute 4%, assuming your contribution exceeds the amount necessary to get you the 4%. The difference shows up in your take home pay, not in the 401k. Either way, your 401k will have $7,500 from you and 4% from your employer. However, you will take home less money in contributing to the Roth. So, in absolute terms, you'll get the same match. If you think in terms relative to the amount you needed to have in salary, then it's less. The difference in absolute amounts would come if the extra tax burden on your paycheck would cause you to contribute less to the 401k. Then, you might receive less match from your employer.

No, your contributions will not be higher in a state with no income tax, you'll just have more money in your take home pay. If you make $100k and ask for 4% to be put in your 401k, then you'll contribute $4k whether you have a state income tax or not. You'll just have more in your paystub in the no income tax state.

birdec
Posts: 31
Joined: Fri Jul 11, 2014 10:44 am

Re: 401k Employer match question

Post by birdec » Sat Oct 14, 2017 2:45 pm

WL2034 wrote:
Sat Oct 14, 2017 2:36 pm

So if my match is 4% and my gross pay is $100 in a pay period, my employer match is $4 for the pay period. It is based on gross pay and it is pre-tax, so it has nothing to do with whether I contribute roth or traditional. I just need to set my contribution to 4% or greater to receive the full match.
Ok that makes sense. I didn't realize contributions were just a percentage of gross pay.

JBTX
Posts: 1976
Joined: Wed Jul 26, 2017 12:46 pm

Re: 401k Employer match question

Post by JBTX » Sat Oct 14, 2017 2:50 pm

birdec wrote:
Sat Oct 14, 2017 2:19 pm
I think I've made a horrible mistake and am hoping someone can confirm it. I'm contributing after-tax dollars to a Roth 401k and my employer is contributing pre-tax dollars (4% match). Because I'm contributing less absolute dollars every month because it's getting taxed (I realize it grows tax-free) my employer is matching a smaller amount than if I would've elected to contribute pre-tax money. If I switch to contributing pre-tax dollars my employer would match that higher dollar amount, right?
If you contribute $10000 to a Roth 401k that is effectively a greater contribution than contributing $10,000 to a traditional 401k because with the Roth the taxes have already been paid. With the tradtional taxes will come on retirement so you will end up with less. If you are in 25% tax bracket you would have to put in $13333 to a traditional to get the same amount after tax as $10000 Roth 401k.

I can’t speak to your employer but typically the match would be the same regardless of t401k or Roth 401k.

Secondly, I moved to a state with no income tax several months ago (I work remotely) but my dollar contribution amounts haven't changed. Because I am contributing after-tax dollars, shouldn't my contribution be higher since I'm no longer paying state income tax?
No. Not really.

Whether you should contribute to tradtional or Roth 401k depends on a lot of factors. I generally agree for most people contributing traditional 401k and then to Individual Roth is a good strategy.

When you were in a state with an income tax odds are contributing to a traditional was probably the best play. But it isn’t a “huge” mistake because having some Roth is good too, and things could change decades down the road that make Roth’s more favorable. Now that you have no state income taxes Roth is more attractive than it was before, but traditional still may be your best bet plus individual Roth IRA.

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