Roth describes how the contribution is taxed; it does not describe what type of contribution it is.
When people hear “Roth” in a 401(k) plan, they often think of an employee choosing to make a Roth 401(k) contribution instead of a traditional pre-tax contribution.
That’s still true. But today, an employer profit-sharing contribution can also receive Roth treatment if the plan permits it and the employee makes the election.
So, an employee could have both a Roth 401(k) contribution and a Roth profit-sharing contribution. Both are Roth. But they are not the same contribution.
Employee Money and Employer Money
A Roth 401(k) contribution is an employee contribution. The employee elects to have money deducted from pay and contributed to the plan. It is included in the employee’s taxable wages and is subject to Social Security and Medicare taxes.
A Roth profit-sharing contribution is an employer contribution. The employer contributes the money to the plan, and the employee elects Roth treatment. It is taxable to the employee, but it is not subject to Social Security and Medicare taxes. The taxable amount is reported separately to the employee.
Keep the Contributions Separate
Because both contributions are called “Roth,” it might seem logical to combine them when sending money to the plan. Don’t. One is an employee 401(k) contribution. The other is an employer profit-sharing contribution. They need to be separately identified and properly recorded by the plan’s recordkeeper.
The Takeaway
A Roth 401(k) contribution and a Roth profit-sharing contribution may share the same tax label, but they are different contributions. One comes from the employee. The other comes from the employer. They are contributed, reported and taxed differently.
Roth tells you how the money is taxed. You still need to know what kind of money it is.