Dear Tax Talk,

Are the employer’s 401(k) matching contributions taxable during the pay period the company matches on? Or are they nontaxable until I start withdrawing from my 401(k) plan when I retire?

— Dan

Dear Dan,

Employer 401(k) matching contributions are not taxable to the employee at the time the employer makes its contribution. The contributions grow “tax deferred” while they are in the account and all amounts in the account are taxed as they are withdrawn during retirement.

Employers that provide this benefit for their employees are really helping them plan for their retirement years by maximizing the tax concepts of tax deferral and tax-free growth.

Tax benefits of a 401(k) plan

  • Employees do not pay taxes each year on amounts they put into a traditional 401(k) account.
  • The employer gets a tax deduction for its 401(k) matching contributions.
  • The money grows tax-free until it is withdrawn.

It is a win-win situation for both employee and employer.

One of my top 10 tax tips is to have employees contribute up to the maximum limit allowed to their 401(k) plan — especially if there is an employer “match.” That is a great incentive to employees to maximize the contribution. It is amazing how much you can accumulate if you start investing in your retirement earlier rather than later.

Thanks for the great question and all the best to you.

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