Matching Roth contributions: potential pitfalls

The SECURE 2.0 Act added an option for employees who receive matching contributions from their employers to their 401(k) plans or other qualified plans. If your plan allows, you can choose to receive employer matches as after-tax Roth contributions. To avoid unpleasant surprises, however, assess the impact of such contributions on your tax bill. After-tax contributions increase your income for the year, but your employer may not automatically withhold the necessary extra taxes.

Suppose your salary is $150,000, and your employer makes matching contributions to your 401(k) account equal to 6% of your salary ($9,000). Assuming you’re in the 24% tax bracket, you’d end up owing an extra $2,160 in federal income tax for the year ($9,000 x 24%) if you opt to take the employer match as a Roth contribution. Plus, you might also owe extra state income tax. To avoid underpayment penalties, consider increasing your withholdings or quarterly estimated tax payments to cover the additional tax liability.

Watch out for fake charities

When there’s a natural disaster or other tragic event, fake charities usually appear, ready to take advantage of your generosity and compassion for those in need. The cost of donating to an illegitimate charity can be high. Not only will your intended recipients be deprived of your donations, but you also can lose valuable tax deductions. Plus, fake charities may attempt to obtain sensitive personal and financial information they can exploit to steal your identity.

Many fake charities use names that are similar to those of legitimate charities, so it’s important to be diligent to avoid being duped. The IRS urges taxpayers to resist pressure tactics and take the time to vet charitable organizations before you donate. Consider using resources like the IRS’s Tax-Exempt Organization Search (TEOS) tool. The IRS also advises taxpayers to avoid charities that ask for donations via gift card or wire transfer. Instead, pay by credit card or check, and don’t provide your Social Security number or other unnecessary personal or financial information.

Are you eligible for the self-employed health insurance deduction?

If you’re self-employed, you may be able to deduct 100% of the health insurance premiums you pay for you and your family. It makes no difference whether you purchase the insurance in your own name or your business purchases it. Keep in mind that the deduction can’t exceed the net income you earn from your business. Also, the deduction is unavailable if you’re eligible to participate in a health insurance plan subsidized by an employer of you or your spouse.

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