Roth 401(k) employer matches may trigger a tax bill for you. Here's what you need to know.

If your company’s offering you a Roth 401(k) match, you should contribute enough to trigger that free money and boost your retirement savings.

But take note: This financial move could lead to a tax bill.

SECURE Act 2.0, which passed in December 2022, allowed employers for the first time to match Roth 401(k) contributions directly into a Roth account. Before the new law, employers had to establish a second traditional 401(k) for their contributions to retirement funds.

There's a wrinkle in the new rules, though.

Remember that your Roth 401(k) contributions are taxed, allowing you, the employee, to withdraw the money during your retirement years without paying taxes.

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But it's different for your employer. Their contributions to your Roth 401(k) through matches are pretax, just like they would be if your company matched a traditional 401(k).

That means you’re on the hook to pay taxes on your company’s Roth contributions the year they're made.

“The biggest pitfall is remembering to... cover the employer contributions,” said Mark Steber, chief tax information officer at tax preparer Jackson Hewitt.

If, for example, your employer contributes $500 to your Roth 401(k), that's $500 of income you need to pay taxes on, he said. 

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What taxes will you owe?

◾ You’ll owe federal taxes on the amount your employer contributes each year.

You’ll “receive a 1099-R with a Code G in Box 7,” said Mark Jaeger, vice president of tax operations at tax software company TaxAct. “This amount will be included as ordinary income on (your) tax return.”

◾ If you live in a state with an income tax, you’ll owe tax there too, he added.

Do you report a Roth 401(k) on taxes?

Your contributions should appear on your W-2, but since they're post-tax, you don't have to report them on your tax return.

But you'll have to report your employer's direct Roth 401(k) contributions, if any, shown on the 1099-R you should receive. That amount will be taxed.

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How can I pay the taxes?

You have a few options for paying the taxes, tax experts say:

◾ Report the contributions on your tax return as part of your income and pay when you file your taxes.

◾ Increase your federal withholdings from your W-2 by filing a new W-4 with your employer if you don’t want a larger tax bill when you file your taxes.

Make estimated tax payments each quarter to cover the additional taxes.

If you live in a state with income taxes, you may wish to do the same in that state, Jaeger said.

What are 2024 contribution limits for a Roth 401(k)?

◾ The maximum amount you can contribute to a Roth 401(k) for 2024 is $23,000 if you're younger than 50.

◾ If you're 50 and older, you can add an extra $7,500 per year in "catch-up" contributions, bringing your total for the year to $30,500.

◾ Employer match contributions don’t count toward those personal contribution limits, but there’s a limit for combined employee and employer contributions. In 2024, it’s either 100% of your salary or $69,000 (excluding catch-up contributions), whichever is lower.

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How were Roth 401(k) matches handled before SECURE Act 2.0?

◾ Before SECURE Act 2.0, an employee would contribute money to a Roth 401(k) but a second traditional 401(k) was established for the employer contributions. 

For example, you contribute $2,000 to a Roth 401(k) with post-tax dollars, but your employer matches that with $1,000 in pretax dollars into a traditional 401(k). 

“If I wanted to convert that traditional 401(k) over to a Roth 401(k), I would pay ordinary taxes (no special capital gains rate) on that $1,000, plus or minus any gains or losses earned through that account,” Jaeger said.

◾ Now, after SECURE Act 2.0, contributions would look like this: you contribute $2,000 to a Roth 401(k) with post-tax dollars, and your employer matches $1,000 to a Roth 401(k).  Your employer issues you a 1099-R, and you must pay taxes on that $1,000.

How many companies offer Roth 401(k) matches?

More than 90% of retirement plans offer a Roth 401(k) option, according to brokerage giant Fidelity, but not many offer the match in its latest form so far.

Fifteen percent have added the optional provision of SECURE 2.0 to allow participants to elect Roth treatment of employer contributions, and one-quarter are actively considering this provision, said Plan Sponsor Council of America, an industry trade group. Nearly 40% have not and will not implement this provision and the rest are unsure.

“Though many plan sponsors like this provision in theory, and the recent guidance has made it more attractive to offer, many don't want the added administrative complexity, especially if they already allow in-plan Roth conversions,” the Plan Sponsor Council of America said.

Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at [email protected] and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.