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?
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.
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