Maxed my Roth 401k - Should I really owe this much to taxes?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
Speed777
Posts: 9
Joined: Mon Jan 13, 2020 10:36 pm

Maxed my Roth 401k - Should I really owe this much to taxes?

Post by Speed777 » Tue Mar 03, 2020 7:43 pm

A little background, I always claim 0 on my W-4 because I like getting money back at the end of the year. For 2019, I maxed my Roth 401k (just under $19,000). I’m working on my taxes now and am not quite sure if I made a mistake or if it’s actually accurate. Instead of getting a nice refund like I normally do, I owe quite a substantial amount. Does that sound right? If I claimed 0 and was already having the max withdrawn from my checks, is it normal to still owe a LOT when doing your taxes? This is a ROTH, so I understand that you pay taxes on it now, so you don’t have to pay later. But I thought they had already taken enough out of my paychecks to cover the taxes on my ROTH investments. Any insight you can provide would be greatly appreciated!

lakpr
Posts: 5327
Joined: Fri Mar 18, 2011 9:59 am

Re: Maxed my Roth 401k - Should I really owe this much to taxes?

Post by lakpr » Tue Mar 03, 2020 7:55 pm

Choosing 0 as exemptions does not guarantee that you will have enough tax withheld to cover the entire tax liability. Especially after the Tax Cuts and Jobs Act, the withholding calculator is broken, and does not quite approximate the tax liability.

It also depends on what your total income / tax bracket is. Sounds like you are either at the threshold of 24% tax bracket, and possibly beyond, with your income? In those brackets, it's a big mistake to opt for a Roth 401k.

Did you meet the safe harbor at least with the amount of taxes withheld from your paycheck? You may also owe penalties if the tax liability due to IRS is more than $1000, unless you met the safe harbor test. [ 90% of current year liability or 100% of previous year liability; for higher income folks that's 100% of current year liability -- you failed this -- or 110% of previous year liability ]

Silk McCue
Posts: 4654
Joined: Thu Feb 25, 2016 7:11 pm

Re: Maxed my Roth 401k - Should I really owe this much to taxes?

Post by Silk McCue » Tue Mar 03, 2020 8:00 pm

Two paychecks into the new year we can easily estimate income and taxes due for the year and tweak withholding if necessary. Sounds like you didn’t sanity check your withholding. Not much you can do for last year if you are properly calculating taxes but you can now for this year.

Also, the reference to maxing out your Roth 401k is just an unnecessary confusing point in your post as it has no bearing on the under withholding.

Cheers

delamer
Posts: 10100
Joined: Tue Feb 08, 2011 6:13 pm

Re: Maxed my Roth 401k - Should I really owe this much to taxes?

Post by delamer » Tue Mar 03, 2020 8:03 pm

There’s no “normal” in terms of owing v. refund.

In your case, if — for example — you switched from putting $19,000 into a traditional 401(k) in 2018 to putting $19,000 into a Roth 401(k) in 2019, then your tax bill will go up (all other aspects being the same). But there are lots of moving parts that determine your actual tax bill and then your withholding is the other factor that determines owing v. refund.

Do an estimate of your 2020 taxes using the TaxCaster app and figure out your actual withholding from your paycheck (annualized). If the withholding is less, you can adjust your withholding by adding actual dollar amounts per paycheck.

Topic Author
Speed777
Posts: 9
Joined: Mon Jan 13, 2020 10:36 pm

Re: Maxed my Roth 401k - Should I really owe this much to taxes?

Post by Speed777 » Tue Mar 03, 2020 8:08 pm

Thank you for your insight! How do I know what tax bracket I fall into?

delamer
Posts: 10100
Joined: Tue Feb 08, 2011 6:13 pm

Re: Maxed my Roth 401k - Should I really owe this much to taxes?

Post by delamer » Tue Mar 03, 2020 8:15 pm

Speed777 wrote:
Tue Mar 03, 2020 8:08 pm
Thank you for your insight! How do I know what tax bracket I fall into?
You now know your taxable income for 2019 from your tax form.

This chart shows the marginal tax brackets for the year by taxable income, broken out by filing status: https://www.bankrate.com/finance/taxes/ ... ckets.aspx

Remember that the rate for your bracket is for your last dollar of taxable income, not your entire income.

lakpr
Posts: 5327
Joined: Fri Mar 18, 2011 9:59 am

Re: Maxed my Roth 401k - Should I really owe this much to taxes?

Post by lakpr » Tue Mar 03, 2020 8:24 pm

delamer wrote:
Tue Mar 03, 2020 8:15 pm
Speed777 wrote:
Tue Mar 03, 2020 8:08 pm
Thank you for your insight! How do I know what tax bracket I fall into?
You now know your taxable income for 2019 from your tax form.

This chart shows the marginal tax brackets for the year by taxable income, broken out by filing status: https://www.bankrate.com/finance/taxes/ ... ckets.aspx

Remember that the rate for your bracket is for your last dollar of taxable income, not your entire income.
Also remember that the figures are "TAXABLE" income. So you need to subtract $12,400 (if you are single) or $24,800 (if you are married and filing jointly) from your individual/combined salary, and then lookup in that table.

User avatar
CAsage
Posts: 1747
Joined: Sun Mar 27, 2016 6:25 pm

Re: Maxed my Roth 401k - Should I really owe this much to taxes?

Post by CAsage » Tue Mar 03, 2020 8:28 pm

If you switched from a pretax 401k to a Roth 401k, then you might have inadvertently increased your taxable income because of the loss of the pretax 401k. Yes, one needs to pay the IRS now for the incredible privilege of sheltering $19K income in tax-free investments. Suggest you compare your 2018 and 2019 tax returns, it should be clear what happened to your income.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

gr7070
Posts: 1143
Joined: Fri Oct 28, 2011 10:39 am

Re: Maxed my Roth 401k - Should I really owe this much to taxes?

Post by gr7070 » Tue Mar 03, 2020 8:30 pm

You did not get to deduct 19,500 this year from your taxable income, which means you'd owe about $4,000 more in taxes (22% of 19k).

Assuming your withholding didn't change, or not change a lot there's your big tax difference.

Topic Author
Speed777
Posts: 9
Joined: Mon Jan 13, 2020 10:36 pm

Re: Maxed my Roth 401k - Should I really owe this much to taxes?

Post by Speed777 » Tue Mar 03, 2020 8:43 pm

Thanks. This is the first year that I’ve ever contributed to a ROTH. Also the first year I’ve ever contributed this much. So, this is all very new to me. I appreciate your explanation. It makes sense.

I see that there is a penalty for underpaying. I think it’s 2% of whatever you own, but I could be wrong. If I’ve already claimed 0 on my W-4, how could I possibly have contributed more, to avoid the penalty?

Topic Author
Speed777
Posts: 9
Joined: Mon Jan 13, 2020 10:36 pm

Re: Maxed my Roth 401k - Should I really owe this much to taxes?

Post by Speed777 » Tue Mar 03, 2020 9:01 pm

Silk McCue wrote:
Tue Mar 03, 2020 8:00 pm
Two paychecks into the new year we can easily estimate income and taxes due for the year and tweak withholding if necessary. Sounds like you didn’t sanity check your withholding. Not much you can do for last year if you are properly calculating taxes but you can now for this year.

Also, the reference to maxing out your Roth 401k is just an unnecessary confusing point in your post as it has no bearing on the under withholding.

Cheers
I claimed 0 though. There’s no way I would have under withheld if I hadn’t also maxed my Roth 401k. That’s the connection between the 2.

User avatar
grabiner
Advisory Board
Posts: 27123
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Maxed my Roth 401k - Should I really owe this much to taxes?

Post by grabiner » Tue Mar 03, 2020 9:57 pm

CAsage wrote:
Tue Mar 03, 2020 8:28 pm
If you switched from a pretax 401k to a Roth 401k, then you might have inadvertently increased your taxable income because of the loss of the pretax 401k. Yes, one needs to pay the IRS now for the incredible privilege of sheltering $19K income in tax-free investments. Suggest you compare your 2018 and 2019 tax returns, it should be clear what happened to your income.
However, this shouldn't have much effect on whether you get a refund or a tax bill. Switching to the Roth 401(k) caused your taxable income to increase by $19,000, but it also caused your employer to withhold based on a salary $19,000 higher. Thus it would not affect the refund unless the withholding is in the wrong tax bracket.

And that might happen. Do you have a working spouse? If so, your $19,000 might have had withholding based on a 12% tax rate (because your salary alone would put a married couple in the 12% bracket), but you are actually in the 22% tax bracket, so you had $1900 less withheld than you should have. The W-4 has a worksheet for multiple jobs which tells you how to adjust your withholding in this situation.
Wiki David Grabiner

lstone19
Posts: 748
Joined: Fri Nov 03, 2017 3:33 pm

Re: Maxed my Roth 401k - Should I really owe this much to taxes?

Post by lstone19 » Tue Mar 03, 2020 11:39 pm

I agree with Grabiner. That you contributed to a Roth 401k (instead, I assume, a regular 401k) is a red herring because your employer is withholding based on the amount going to the Roth 401k being taxable. Everything else being equal, more will be withheld when contributing to a Roth 401k than a regular 401k.

Something else must have changed. You need to compare this year’s return to last year’s and see where something has changed significantly. Unless there’s something else significant like a change of marital status or spouse started working or some other significant income this year that you didn’t have last year.

DIFAR31
Posts: 413
Joined: Mon Jan 01, 2018 5:51 pm

Re: Maxed my Roth 401k - Should I really owe this much to taxes?

Post by DIFAR31 » Tue Mar 03, 2020 11:49 pm

Speed777 wrote:
Tue Mar 03, 2020 8:43 pm
If I’ve already claimed 0 on my W-4, how could I possibly have contributed more, to avoid the penalty?
Complete and submit to your employer a new W-4 form that asks for an additional amount to be withheld each pay period. On the 2020 W-4, that is done on line 4(c). But note, there are no longer allowance numbers entered on the W-4 form. The IRS has a new system for calculating withholding and competing the W-4. Have fun with that.

Post Reply