Paystub - need explanation of Roth 401 calculation

[Guest Wedge1]

I recently elected to place half of my pay to a Roth 401K account. My personal calculations differ from the numbers posted on my paystub.

My gross pay per pay period is 1528.50. Half of that is 764.25, the amount showing below as going to the Roth 401K. Please review my paystub below. I am unsure how to arrive at the same amount as shown.

To me, it appears that the money being contributed to my Roth 401K is NOT being taxed. Please review this paystub and explain what I am misunderstanding:

FEDERAL INCOME TAX - 143.88SOCIAL SECURITY TAX - 90.32MEDICARE TAX - 21.12STATE TAX- 68.22*Company 401K PLAN		*L.T.D. - 2.40*AD&D - 1.15*HEALTH CARE - 53.46*DENTAL - 10.59*EE HSA - 4.17ROTH 401K - 764.25LIFE INS - 3.49ER HSA - 20.83CHECK TWO - 365.45*denotes pre-tax deductions

[austin3515]

Not nearly enough information man. What you need to ask your employer is, what are my federal wages for this pay-period? it should equal your gross pay (unless you have section 125 premiums). Then, based on the number of exemptions you've claimed on your W-4 you should be able to reference a withholding table to determine how much the federal withholding should be. The table to figure this out is in publication 15 - see that table on page 37.

http://www.irs.gov/pub/irs-pdf/p15.pdf

[Guest Wedge1]

Well i'm lost. I thought the Federal withholding is the listed Federal Income tax.

I'm single, paid bi-weekly, no exemptions. You might have to draw a picture for me.

Here's what I thought I would see happen to my paycheck when i decided to contribute 50% to a Roth 401K: I was taking home net of 1039 before contributing 50%. I thought this number would split, with half coming to me and the other half going into the Roth 401K. Very simple, but apparently wrong.

[Guest Wedge1]

Maybe this helps:

Total Earnings: 1528.50

Total Taxes: 323.54

Total deductions (excluding taxes) 839.51

Net Pay 365.45

Pre-tax Deductions 71.77

Federal Taxable Earnings 1456.73

[Bird]

When you elected 50% as your Roth contribution that's 50% of your gross. I don't think there's any practical way for a payroll service to do 50% of net. All the numbers look right to me. If that's not what you want just change it to a flat dollar amount ($500 or whatever) or lower percentage (of gross) - e.g. 33%.

[masteff]

When you elected 50% as your Roth contribution that's 50% of your gross. I don't think there's any practical way for a payroll service to do 50% of net. All the numbers look right to me. If that's not what you want just change it to a flat dollar amount ($500 or whatever) or lower percentage (of gross) - e.g. 33%.

I'm agreeing w/ Bird and just expanding on his 33% -- if you only wanted 1/2 of $1039 to be deducted for Roth, then 50% of $1039 is close to 33% of $1528.50.

[JanetM]

Wedge1, not sure I can even begin to understand your logic.

The fed tax withheld doesn't look right. Is too high to be counting Roth pretax and too low for single zero status. You need to go visit your payroll folks and see what is happening.

[austin3515]

See the row for 1440 - 1460 on page 44 of the link I gave you. Based on that, and based on 0 exemptions, you should have 204 withheld. You're withholding is actually pretty close to the withholding for 2 exemptions - maybe that's the cause of the difference?

[masteff]

And looking at the W-4 form, single and 2 would be fairly normal. http://www.irs.gov/pub/irs-pdf/fw4.pdf

Perhaps, wedge1, you meant zero dependents?

[Guest Wedge1]

@masteff - Yes, zero dependents.

My real concern is that the money going into the Roth 401K has not been taxed. I am less concerned about the dollar amount than I am with the status of the dollars going into the account.

It simply took me by surprise that 764.25 was going into the account. I would like to understand how I arrived at this number. It is more than I had in mind, but as long as it is tax-free, it is not a problem. As already mentioned, I can always change the amount I contribute.

edit: I should just google "understanding your paycheck"

[austin3515]

You ended up at 764.25 because this is half of your gross. If you wanted to reduce your net pay by 1/2, you should divide your net check (Before Roth) by your gross pay, and that percentage is the amount you should elect to contribute. That should be pretty close.

[Mike Preston]

@masteff -

My real concern is that the money going into the Roth 401K has not been taxed.

...It is more than I had in mind, but as long as it is tax-free, it is not a problem.

Oh, my.

First, and foremost, "but as long as it is tax-free, it is not a problem" seems to imply that you want the monies you deposit to escape current taxation. That isn't the way Roth 401(k) contributions work. You ARE taxed on them now, just as if you had put them into your bank account. It is the appreciation (earnings) in the Roth 401(k) account that are tax-free. And that only happens in certain circumstances. If you pull the money out of the Roth 401(k) too soon, even the earnings are taxed.

[Guest Wedge1]

@masteff -

My real concern is that the money going into the Roth 401K has not been taxed.

...It is more than I had in mind, but as long as it is tax-free, it is not a problem.

Oh, my.

First, and foremost, "but as long as it is tax-free, it is not a problem" seems to imply that you want the monies you deposit to escape current taxation. That isn't the way Roth 401(k) contributions work. You ARE taxed on them now, just as if you had put them into your bank account. It is the appreciation (earnings) in the Roth 401(k) account that are tax-free. And that only happens in certain circumstances. If you pull the money out of the Roth 401(k) too soon, even the earnings are taxed.

I meant to say "but as long the account earnings are tax-free..."

I do indeed want that money to be taxed now, then deposited into an account that can earn interest that will be free of taxation. The point of my original post was to make sure that the money HAS been taxed because it looks as if 50% of my gross pay has been contributed to the account, and i was worried that this meant the money was not taxed.

What do you mean by "And that only happens in certain circumstances"? I understand there are certain guidelines to follow, else there are penalties to pay. Were you referring to something else?

[Mike Preston]

What do you mean by "And that only happens in certain circumstances"? I understand there are certain guidelines to follow, else there are penalties to pay. Were you referring to something else?

No, I wasn't. But it is more than just "penalties". If the money is withdrawn before the guidelines allow, not only does one have to pay the penalties, but the earnings are subject to tax. Of course, it is possible to just lump the tax in with the penalties and call all of it the cost of withdrawing the money early.

Sounds like you've got all the bases covered.

There are two issues here: 1) is the payroll system withholding the right amount of income tax? 2) are the amounts being invested in your Roth 401(k) account both: a) being taxed currently; and, b) eligible for the earnings exclusion?

#1 is something that you can adjust if you don't like. What is withheld doesn't have any impact on the tax you must pay to the IRS (although if it is too low, you can be subject to penalties in certain circumstances). All it does is modify the amount you must come up with when you file your taxes. If you do a projection of the amount you will actually owe and you contrast that against what is being withheld, you can then modify your withholding if you don't like the result.

#2 looks right to me, simply because in your original post, you did NOT put an asterisk next to the amount shown as your Roth 401(k) contribution. The asterisk indicates that the amount is being withheld from your paycheck AND excluded from your taxable earnings. Since the asterisk wasn't there, it looks like your payroll provider has done things properly.

[Guest Wedge1]

Wow a lightbulb just turned on in my head

I understand the calculations now.

Mike, austin, masteff, Janet, Byrd, thank you all. Your input and links has helped me.