401k vs Roth 401k tax question

[cppoly]

For a company 401k, the money is taken out pre-tax and at the end of the year my taxable income is reduced by these deductions. For instance, a salary of $50k with $5k in 401k deductions brings down my taxable income to $45k.

However how does this work with a company Roth 401k? I understand that the same $5k in deductions is taxed up front and let's say $3.5k is invested in my account as apposed to the full $5k as with a regular 401k. What about at the end of year? Is my taxable income still $45k or is it $50k?

[NYBoglehead]

Your taxable income is the 50k. Roth contributions are after-tax. Everyone needs to plug their own numbers, 3.5k in a Roth 401k may indeed be worth more than 5k in traditional when you retire, depending on the rest of your situation.

Usually it makes sense to go with traditional once you are in the 25% bracket or higher, and some states have different tax rules for 401ks. I live in New York state, which has a fairly high state income tax, but in retirement the first 20k that comes out of a 401k is exempt, so traditional 401k contributions save me money on state income taxes in this case.

Roth 401ks usually only make sense if you are in a low tax bracket now, are in an income tax-free state right now and plan on relocating in retirement, or plan on having a DB pension that will fill in your deductions/exemptions/lower brackets in retirement.

The best strategy in my opinion is to max out a traditional 401k and max out a Roth IRA. If you want further tax diversification maybe allot a portion of your 401k savings to the Roth option but leave the lion's share in traditional.

[donaldfair71]

Taxable income stays at 50K. It doesn't reduce your taxable in a Roth.

[cppoly]

I'm confused though. If Roth deductions are already taxed when the money goes into the account, why would my taxable income still remain the original $50k? Wouldn't that be taxing twice?

[camaro327]

You're only taxed once. Your income is still reported as 50K on your W-2, however the money for taxes has already been withheld from your pay.