Scenario 1: contribute 17.5k to a regular 401(k)
taxes on 50k - 17.5k = $32,500 taxable income are $4,421
after taxes and contribution you have: 50,000 - 17,500 - 4,421 = 28,079
if your value doubles and your tax rate at retirement is the same (which is doubtful), if you were to withdraw all of the $35,000 at once, your tax would be: $4,796, leaving you $30,204
Scenario 2: contribute $17,500 to a Roth 401(k)
taxes on $50k = $8,356
after taxes and contribution you'll have: 50k - 17,500 - 8,356 = $24,144
if your value doubles you'll have $35,000 tax free
ignoring the time value of money (at peril), in the first case: total: $58,283
in the second case: $59,144
The beauty of a Roth 401k is that you are maximizing the income in retirement: $35,000 Roth vs. $30,204, at a time when you need it most (ostensibly). Additionally, there is no guarantee that tax rates won't soar by then, so with a Roth you are, to some degree, protected against those higher tax rates, leaving more money in your pocket at retirement. IMO, Roth is the way to go.
You have the Roth and traditional 401(k) exactly backwards. Traditionals are pre-tax, Roths are post-tax.
I know that the annual limits for 401k are $17,500, and that money saved from Roth 401k are pre-tax and traditional 401k are post-tax income. My question is, since the contribution to a Roth 401k are already taxed, wouldn't that make the Roth 401k limit much higher?
For instance, let's say I make $50,000. If I contribute $17,500 to a traditional 401k, I pay income tax on the remaining $32,500 and have $17,500 that will be taxed when I eventually withdrawal it. For argument sakes, let's pretend that the $17,500 goes up 100% by retirement and has a value of $35,000. I withdraw that, pay the taxes, and it is worth $25,000 (give or take).
On the other hand, if I contribute to a Roth 401k, I would pay taxes now on my $50,000 income, and have $40,000 remaining (give or take). From the $40,000, I can contribute $17,500 to the Roth 401k. I then have $22,500 remaining. Meanwhile, my Roth 401k has a value of $17,500. Just like the situation above, that $17,500 would become $35,000. This time, however, I've already paid the tax. So, in the first example, I come out with $25,000 of retirement money and in the second, $35,000.
Am I understanding it wrong, or does the Roth 401k allow for a higher contribution limit based on the fact that it is already taxed?
