When it comes to Roth 401(k), Roth 403(b) and Roth 457(b) plans, the mechanics are different. The IRS states that the “Roth” prefix does not create a new plan. Instead, Roth defines the type of contribution being made to the plan. Designated Roth contributions are included in your gross income, unlike non-Roth contributions. However, your employer’s matching contribution goes into a pre-tax account, just like the non-Roth versions of the plan. Here is an example.
Let’s say you make $100,000 per year and you elect to contribute 5% of your salary to your employer provided 401(k) plan. And, your employer matches 100% of your contribution to the plan. So, you contribute $5000 to your account, and your employer matches your contribution, contributing $5000. The total deposit into your account is $10,000. Your employer will report that your salary is $95,000 for the year (W-2 Box 1). When you withdraw the money from your 401(k), you’ll have to pay tax on the entire withdrawal. If that $10,000 grew to $12,000, you would have to pay tax on $12,000.
Using the same facts as before, but you now contribute to a Roth 401(k). Your $5000 contribution goes into your post-tax account, but your employer’s matching contribution goes into a pre-tax account. The total deposit into your account is still $10,000. However, your employer will report that you made $100,000 (W-2 Box 1), instead of $95,000. Also, let’s assume that the $10,000 contribution also grows to $12,000. When you withdraw the $12,000, you will only need to pay tax on $6000, instead of $12,000.
In summary, even though you contribute to a Roth plan, the employer matching contributions are treated as if the plan is non-Roth.
For more information, read the IRS FAQ.
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