Trying to better understand Roth 401k contribution limits

[978rl]

Trying to better understand Roth 401k contribution limits. Knowing that the limits went to $19000 for 2019, when putting your money in a roth 401k is $19k pre tax limit or $19k post tax?
Just for simple #’s:
Assume $100,000 salary, company contributes 100% up to 4%, the market is 0% for the year, you have a 25% tax rate, and your starting 401k balance is zero.
Would it be…

A)   Your contributions end after you hit $19,000 (pretax), your employer puts in $4,000
   So maxing out the roth 401k you would have $17,250 ($19,000-25% plus $4000-25%) in your account assuming zero % return at the end of the year

B)   Your contributions end after you hit $25,330 (pretax, so that minus 25% tax, you would be at $19,000), your employer puts in $4,000
   So maxing out the roth 401k you would have $22,000 ($19,000 plus $4000-25%) in your account assuming zero % return at the end of the year

Just trying to figure out to max out I should set my contributions to 25% or 19% is say I made $100k a year

Thanks for any help!

[Lucky Recardito]

Roth 401k contributions go in as post-tax dollars. And the limit is $19,000 of those post-tax dollars. You're over-thinking this!

Example, if your $100,000 were all to be paid on one giant paycheck:

• Your gross pay is $100,000.
• Taxes are withheld at 25%: $25,000 (this is a gross oversimplification, of course, but sticking with your example!)
• Your Roth 401k contribution is deducted: $19,000
• Your take-home pay: $100,000 - $25,000 - $19,0000 = $56,000
• Your employer puts $4,000 into your 401k; you now have $25,000 in your 401k.

If you make $100K, and want to put $19,000 in your 401k  in 2019, set your contribution to 19%.

FWIW, you would also set it to 19% to contribute $19K on a Traditional basis -- the difference would be in the amount of tax withheld and your take-home pay... not in the value of your 401k contributions. It would work like this:

• Your gross pay is $100,000.
• Your Traditional 401k contribution is deducted: $19,000
• Taxes are withheld at 25% (of $100K - $19K): $20,250
• Your take-home pay: $100,000 - $19,000 - $20,250 = $60,750
• Your employer puts $4,000 into your 401k; you now have $25,000 in your 401k.

[NathanP]

Your employer contributions don't count towards your 19,000 limit. Ignore them.

You will be able to put up to $19,000 into a Roth 401k account. The taxes owed on these dollars would be collected from your remaining take-home pay. Do consider today's marginal tax bracket vs. your planned bracket in retirement. In many cases you should contribute to the traditional 401k and take the tax savings during your higher income years and then pay the taxes when retired.

For example, I am deferring the 22% federal tax today, and likely will pay a mix of 0, 10 and 12% in retirement.

[978rl]

thanks for the info! This is the 1st year my Employer is giving the roth 401k option. And I have always maxed out the traditional 401k in the past. And wanted to do the same with the roth 401k

there are obvious pluses and minuses for both 401k and roth 401k. From what I gather if you have the option of maxing either traditional or  Roth 401k, the Roth will allow you to have a larger net balance at the end of the day. Because the $19k that you put into the Roth will not be taxed, but the $19k you put in the traditional 401k will be reduced when taxes are withdrawn. However, if you are in a higher tax bracket today than what you will be in the at the time you withdraw in retirement, roth 401k isn't necessarily the better investment. Correct?

[seattlecyclone]

there are obvious pluses and minuses for both 401k and roth 401k. From what I gather if you have the option of maxing either traditional or  Roth 401k, the Roth will allow you to have a larger net balance at the end of the day. Because the $19k that you put into the Roth will not be taxed, but the $19k you put in the traditional 401k will be reduced when taxes are withdrawn. However, if you are in a higher tax bracket today than what you will be in the at the time you withdraw in retirement, roth 401k isn't necessarily the better investment. Correct?

Basically correct, yes. Assuming you could put as much money as you want into a retirement account, the only real factor to look at would be current vs. estimated future tax rate. However as you note, the contributions are limited, and a Roth dollar is worth more than a traditional dollar because it has already been taxed.

In this case the real comparison is between $19k in Roth against ($19k in traditional + $19k * (your tax bracket) in taxable). Even in this comparison the dominating factor is current vs. estimated future tax rate. Since the taxable investment in the traditional 401(k) scenario will provide some lower returns due to taxes on dividends and capital gains, that can act as a tiebreaker in favor of Roth if you expect your tax rate to be the same or very similar in retirement.