Is the $17,500 max in a Roth 401k pre or post tax?

[Allen]

If I contribute the max to a Roth 401k, is that taking $17.5k of my income in a year, taxing it, and then putting it in the Roth 401k?  Or, do I get to contribute $20.5k 'pre-tax', pay the tax, and then end up with a max of $17.5k in the Roth 401k assuming I'm 15% tax bracket.

Does that question make sense?  If it's the second way, you get to essentially squeeze more money into a Roth 401k than in a normal 401k.

[ch12]

I get to contribute $20.5k 'pre-tax', pay the tax, and then end up with a max of $17.5k in the Roth 401k assuming I'm 15% tax bracket.

If it's the second way, you get to essentially squeeze more money into a Roth 401k than in a normal 401k.

Yes, you get to squeeze more money into a Roth 401k than into a normal 401k. The way that it works, from my perspective at least, is that I contribute $17,500 of my net pay from my paycheck directly. When tax time comes around, there are no deductions; I'm paying taxes for that year, and my income includes my Roth contributions. My taxes are withheld at what my company thinks is my marginal rate (cough this is way higher than my effective rate, lemme tell ya), and I don't get the lovely tax deferral that you'd get with a traditional 401k. However, I'm in a rather low bracket (15%, just as you've got in this example), so I'm taking advantage of that while I can. I only worked for half the year.

As my income rises, I'll start filtering money into my traditional 401k as well. I'll be the next bracket up this year, since I'll be working the full year.

[Allen]

Thank you.  So a valid strategy might be to contribute enough to the 401k to ensure my taxable income (after deductions and exemptions) is right at the threshold of the 25% bracket, and then put the rest in the Roth 401k, up to a max contributed amount of 17.5k?

[ch12]

Thank you.  So a valid strategy might be to contribute enough to the 401k to ensure my taxable income (after deductions and exemptions) is right at the threshold of the 25% bracket, and then put the rest in the Roth 401k, up to a max contributed amount of 17.5k?

That's my own strategy. YMMV

From a pure numbers perspective, shoving all of your retirement money into traditional accounts is better for early retirees. http://www.madfientist.com/traditional-ira-vs-roth-ira/

I would be remiss if I didn't mention at all the classic argument against Roth accounts. Everyone always says that you pay your marginal rate for each additional dollar you earn, whereas you pay your effective rate for taxes. When you defer taxes, you tuck away that money for a time when your effective rate is lower.

It's worth the time to read this: http://www.gocurrycracker.com/never-pay-taxes-again/

In the end, this is up to you and your goals. Mine happen to align with the strategy outlined in your response.

[Allen]

I'm familiar with the article you linked about traditional vs. roth, but that presupposes I have SOME money in a Roth or other accessible funds to start my Roth laddering over 5 years of converting my traditional into a Roth tax free right?  So to get there, I need to get some amount into a Roth at least 5 years before I retire, right?

[ch12]

It depends on how you want to structure the beginning of your early retirement and how high your expenses are. You can roll over a bit tax free (the amount of your standard deduction and exemption). If you can live on that in a state without income tax, you're home and dry. You'd have 5x your annual expenses in Roth contributions and be able to take the money out as you liked. You'd start your conversion the year after you retire, and then be able to use your contributions 5 years later while paying zero taxes.

That's clean and efficient, but I do have safety margin packed in. I commit the cardinal sin of having cash, because I'd rather have the money in my Roth account working for me. MMM says to use VBIAX.
 

But you don’t want your employees hanging around eating donuts in the smoking lounge of your zero-interest checking account.

http://www.mrmoneymustache.com/2011/04/10/post-4-what-am-i-supposed-to-do-with-all-this-money/

I have the problem of trying to get more money into my retirement accounts (a good one to have, I suppose), so I deeply do not want to deplete my untaxed growth vehicle. I also don't want the first 5 years of retirement to be eaten up in a 2008-2009 drop. I've been living off of my cash cache while putting the vast bulk of my paycheck in Roth retirement accounts. It's not money maximizing to have cash reserves as large as I do, but it's how I handle the 5 year gap.