The Surprise Tax Bill Hidden in Your Roth 401(k) Match

Back in 2022, a law called SECURE Act 2.0 gave employers a new option.

They can now let you take your employer match, so the money your company adds on top of what you contribute, and they can put it into the Roth side of your 401[k] instead of the traditional side.

Now, that sounds great on the surface.

Roth money grows tax-free, and it comes out tax-free in retirement.

So most people who understand Roth accounts, well, they want more of that, not less.

But here's the part about this contribution almost nobody explains clearly.

When an employer contribution goes into your Roth 401[k], well, the IRS treats it as extra income to you in the year it lands in your account.

So not when you retire, not when you withdraw it, the year it is deposited.

And because it is treated as income, your plan administrator has to report it on a form called IRS 1099-R.

Now, if you're familiar with that form, think about that for a second.

A 1099-R usually means that you took a distribution.

You pulled money out of a retirement account.

So that is the form people associate with cashing out or rolling over or taking a required minimum distribution.

But in this case, you did not touch a dime.

The money went straight into your account, and it stayed there.

You just owe income tax on it anyways because the IRS counts the employer's Roth contribution as compensation to you the moment it is allocated to your account.

And there is also a second wrinkle to this that makes it worse.

There is no tax withholding on the money.

So when your paycheck comes in, taxes get pulled out automatically before you ever see it in the checking account.

But when this employer Roth contribution lands in your 401[k] account, well, nothing gets withheld, zero taxes.

So you are responsible for the entire tax bill yourself through either your regular withholding adjustments or maybe estimated payments throughout the year.

And of course, if you do not plan for it, well, you could owe more than you expected when you file your taxes.

And the timing makes this even messier because employers are not required to make their match or profit-sharing contributions right away.

Some companies wait until the following year, sometimes as late as their tax filing deadline with extensions, which of course can stretch into September or October of the year after.

So a retirement contribution that's tied to work you did in 2025 could actually get deposited into your account in 2026.