Is the Roth 401k contribution limit pretax or after tax?
By admin ~ August 22nd, 2009. Filed under: General.
Is the Roth 401k contribution limit pretax or after tax?
I understand the contribution limit for any type of 401k is $16,500 per year. I am wondering if this is on a pretax or after tax basis for the Roth 401k.
If the limit is after tax, then technically you can contribute significantly more to your account. You would be able to contribute $25,385 of your paycheck to your Roth 401k, have it be taxed at 35% to bring it down to $16,500. Is this the case? Or can you only contribute 16,500 of your paycheck?
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August 22nd, 2009 at 4:18 pm
August 22nd, 2009 at 4:18 pm
Regardless of what your pre-tax income is…once taxes are deducted…the max is the $16,500…as you've correctly stated.
By definition…all contributions are after tax. So, yes…the contribution would be make with after tax funds. Caveat…If you 'artificially' inflate your eligible contribution amount during the year, and later..when the year is complete, or nearly complete, and it is determined that you have 'over contributed' you WILL be forced to subtract the excess contributions and any associated gains would be forfeited. Yes, they track those kinds of things…but, back to the 'essence' of you question….
… Depending on how you "interpret" it…mathmatically…the 'after tax' effect does drop down your contribution amount (because the tax is minused up front) but then the benefit of growing tax-free…and having any/all growth withdrawn tax-free is a MASSIVE benefit.
($25k - taxes= $16k…later is $80k (4x growth)…the entire sum is yours! "$80k in your pocket")
If the contribution was pre-tax…say $25k…and later was $100k (4x growth)…the entire sum would be taxed.
(25% tax brack= $25k…"$75k in your pocket" …after tax.)
Anyway you slice it, practically, the Roth wins…and the examples above are based off of a ONE year contribution…if you (in general terms) continue making contributions of many years…of course…the potential savings amounts are HUGE…and so are the after-tax benefits!!!