Question

When an employee has a Roth 401(k) with an employer match, how are the employer's matching funds applied?

a) Taxed Immediately
b) Taxed at Retirement
c) Contributed Tax-Free
d) Subject to Early Withdrawal Penalty

Answer 1

Employer's matching funds in a Roth 401(k) are taxed at retirement, unlike employee's after-tax contributions that can be withdrawn tax-free. If withdrawn early, these matching funds may also incur an early withdrawal penalty.

Step-by-step explanation:

When an employee has a Roth 401(k) with an employer match, the employer's matching funds are treated differently than the employee's Roth contributions. While the employee's contributions are made with after-tax dollars and can be withdrawn tax-free in retirement, the employer's contributions are made pre-tax and are taxed at retirement. This means when the employee withdraws the matching funds during retirement, they are taxed as income at the employee's current tax rate at that time. Additionally, if these funds are withdrawn early, they might be subject to an early withdrawal penalty, which is typically 10%.