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A few things here:

  • A Roth IRA is separate from a 401k. Roth IRA or a regular ira have limits completely different and separate from a 401k. Ira’s are like 7500 and 401ks are like 23k. Notably also, iras have income limits that’s like 145k or something. If you are above that you can’t contribute. A Roth IRA you contribute post tax earnings and the growth doesn’t get taxed (you save on capital gains basically)
  • A 401k is generally pre-tax contributions, then you pay taxes when you take out distributions at retirement. There are some post-tax 401k plans now I think though.

401ks often have employer matches, so you should max your 401k, then contribute to an IRA if you are able to.

 

For traditional 401(k) contributions, you get the tax deduction now but withdrawals are taxed as ordinary income at retirement. For Roth 401(k) contributions, you pay tax now but withdrawals at retirement are tax-free.

So traditional 401(k) contributions would make sense if you think your current marginal tax rate (i.e. current tax bracket) is larger than what you expect your marginal tax rate to be at retirement, and Roth 401(k) contributions would make sense if you think your current rate is less than what you expect your retirement rate will be.

Two other less-discussed but still valid points:

  • If you currently live in a state with high income taxes and plan to move to a low-tax state at retirement, traditional 401(k) contributions could make more sense
  • With traditional 401(k) contributions, you're getting the tax break upfront. If you think a future President Ocasio-Cortez might try to tax Roth 401(k) distributions (as President Obama once tried to do with 529 plan distributions), that would be another point in favor of traditional 401(k) contributions

(Disclaimer: not investment, tax, or legal advice.)

 

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