What Does Code 12AA on a W-2 Mean for Employees?

For employees, deciphering the codes on a W-2 form can be challenging. Among these codes is “12AA,” which plays a key role in tax reporting and financial planning. Understanding this code is essential as it affects how certain contributions are reported to the IRS, potentially influencing taxable income.

Location of Code “AA” on the W-2

The W-2 form reports an employee’s annual wages and taxes withheld. Box 12 is critical because it includes codes for various types of compensation and benefits. Code “AA” in Box 12 indicates total contributions to a Roth 401(k) plan during the tax year. These contributions are made with after-tax dollars, meaning they do not reduce taxable income for the year. Instead, they grow tax-free and can be withdrawn tax-free in retirement, provided conditions such as the five-year rule and reaching age 59½ are met.

Tax Ramifications for Employees

Code 12AA on a W-2 has distinct tax implications for employees with Roth 401(k) plans. Unlike traditional 401(k) contributions, Roth 401(k) contributions are made with after-tax dollars and do not offer an immediate tax deduction. However, they allow for tax-free growth and withdrawals in retirement. Employees should weigh their current tax bracket against expected future tax rates. For those who anticipate being in a higher tax bracket during retirement, contributing to a Roth 401(k) may reduce their long-term tax burden and provide flexibility in the face of potential tax rate increases.

Handling Corrections

Discrepancies on a W-2, particularly related to Code 12AA, should be addressed promptly to avoid tax issues. Errors can result in underpayment or overpayment of taxes, leading to penalties or the need to file amended returns. Employees should verify the accuracy of their W-2 by comparing it with personal records and payroll statements. If an error is identified, they should contact their employer’s payroll or HR department to request a corrected W-2, or Form W-2c. This corrected form will be filed with the IRS and provided to the employee. Employees should carefully review the corrected form and keep records of all related communications.

Employer Responsibilities

Employers must ensure W-2 forms accurately reflect contributions, including those marked with Code 12AA. This requires a strong understanding of tax and retirement plan regulations, particularly regarding Roth 401(k) contributions. Employers should maintain precise payroll systems to track and report contributions correctly, adhering to IRS requirements. W-2 forms must be distributed to employees by January 31 each year.

Beyond accurate reporting, employers should educate employees about their retirement plan options and the tax implications of their choices. This could include providing resources that explain the differences between Roth and traditional 401(k) plans or organizing informational sessions. Offering access to financial advisors can further help employees make informed decisions about their retirement contributions.