Regarding the 401(k) vs. Roth IRA: What is the difference? (beside limit contributions). If I understand correctly a 401(k) would withdraw money straight from my paycheck, thereby reducing my taxable income (and shielding this money from taxes until I reach retirement). As opposed to a Roth IRA, which would require me to contribute money after tax, thereby maintaing my maximum taxable income, but allowing me to take my money tax free later in life when I retire. Combined with a lower contribution limit a Roth IRA seems like an inferior choice to a 401(k). Is that reasoning fairly sound?
This reasoning may be a lot of things, but "sound" is not one of them. The roth offers many more benefits than just the time when money is taxed. But, you were looking at the roth vs 401k decision. It is the same, assuming your tax rates are the same.
If you think your tax rate in retirement will be lower, the roth is less attractive. If you think your tax rate will be higher, the roth is much more attractive.
I'd look at cash flow at this point. But generally speaking, a Roth benefits someone in your situation much more than higher income people.
Right now my paycheck (two a month) is 1568 pre-tax/PERS and after-tax/PERS it's 1205, so effectively losing 23%. If I deduct 415 (415x24≈10K/year) a paycheck to a 401(k) my taxable income is reduced to 1153 and thus I save 100 dollars from taxes (1568x.23=363 compared to 1153x.23=265). After taxes/PERS I'll have 888 each paycheck and could still save 500 after tax in an online savings account, still leaving me with 388 every two weeks to cover all my expenses.
You just can't look at tax "savings" based on your net:gross. It is much more complicated than that. For one, some things, like FICA, come off the top and there is no reducing your liability there. Also, we have a progressive tax system, but your withholding is done on more or less a flat rate. You really should be considering your highest marginal rate when doing this type of analysis.
I'd take your highest marginal rates (state and federal) and see what you actually "save". Then, if after a few paychecks, you find you aren't realizing the savings you thought you would (or too much), you can adjust your W4 if need be.