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401k Roth - How to calculate the Roth on paychecks?


remozseo

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Hello!

I am a newbie and just signed on a 401k Roth plan. I still don't understand the basic math behind my personal contributions.

a) my employers contribution will be always pre-tax [employers match]
b) my personal contribution is after tax when choosing ROTH

To make the calculations fairly simple, let's take an example with an annual gross income from 100k.
Personal Contribution: 6%
Employers Contribution: up to 6% with 100%

TRADITIONAL 401k - PRE TAX:
When calculating the Traditional, it seems pretty easy. 6% from 100k is $6k. The employer match is 100%, which is another 6k. The 6% is taken from the gross. That makes a total of 12k annual contribution from both parties. 12k will be tax deferred and also invested into the 401k Traditional Funds.

ROTH 401 - AFTER TAX:
The employers contribution will be handled like the Traditional 401k. It's pre-tax. That means, 6% from the gross of 100k, is 6k. That money will be tax deferred.

But how is the employee's contribution handled with the ROTH?
6% contribution.. is that 6% calculated also from the gross of 100k?
If that's the case... we would have also 6k that can be invested.. but somehow we have to pay taxes on those 6k before investing, right?

Otherwise it wouldn't be after tax?

So my questions is:

  • How and when will the 6% for the 401k ROTH be taxed?
  • How is this thing calculated?


100.000 * 6% = $6000 and from the $6000 I'll have to pay taxes?
 

Or is this all wrong.. and do I have to calculate my 6% Roth Contribution after tax... what means.. I can't use the 100k as gross income... instead.. I have to use the 100k for my gross income first, then... minus all the taxes... and then.. what's left over as my net pay... I'll have to multiply it by 6%????

I am totally lost on that... just would like to know how that works!

Thank you so much for any little help,
appreciate it!
 

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You're overthinking it.  

If you defer 6% of your pay into the plan, you're going to receive a company match based on that 6% deferral.  So, your company match will be (for example) $6,000 and will go into the plan as a pre-tax employer contribution.

As for your deferrals, you may merely choose if it is a pre-tax or Roth.  If pretax, then your W-2 will say $94,000, but that is only for Federal Income Tax purposes.  For plan purposes, your Compensation will be grossed up for the $6K in deferrals; which means your plan Compensation is going to be $100K (regardless of what you contribute and how).

Caveat:  This is, typically, how it works.  I cannot state anything definitively until I actually see your plan document or your SPD.

Good Luck!

CPC, QPA, QKA, TGPC, ERPA

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From a payroll perspective, generally your % is going to come out of gross wages either way.  It's just the taxable income calculation that is going to be different (either $94k will be taxable or $100k will be taxable, but the $6k will still be deferred either way). 

Just to throw in another kink -->Now if you have other non-taxable benefits (section 125), you are going to have to check with HR/your plan document and payroll to see whether those are included or not. In my experience, generally they are included in the % deferral calculation, but there might be other things that are not (imputed income for GTL or a company car for instance).  In  the end though those things would be in/out for both 401k and Roth.....

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