Secure Act 2.0 created another way for us to get funds into the Tax-Free Bucket, but not very many people know about it. The full release can be found in the IRS Notice 2024-2 and Section L. (604) provides clarification on the specific provisions mentioned here.

In summary, the IRS is now allowing employers to match your 401(k) contributions as Roth. This applies to employer matching AND nonelective employer contributions.

How does this work?

• Employer matching contribution goes into a separate Roth portion of your 401(k) (Roth(k) for example) and you pay the income tax on that contribution, generally NOT subject to wage withholding, FICA, or FUTA taxes.
• You pay some taxes NOW but get funds into the bucket that will not be taxed in the future, assuming that we make qualified withdrawals.

*Full disclosure – not every payroll company has figured this out and the IRS has offered zero guidance. Check with your HR department to see if this is an option for you.

We are always looking into the FUTURE when we talk about tax planning and finding ways to fille up the Tax-Free Bucket is a big challenge for all of us. It is probably worth looking at your specific tax situation and having a conversation with your employer about this option.

Next up: What is a “Home Run” in Tax Returns? How about a $0 Refund…

Disclosures

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.