Understanding W2 Box 12 code D vs. AA for 401k contributions - how they affect taxable income on Form 1040

Wait I'm confused, if the difference is already reflected in Box 1 of the W2, then why do we need to report anything from Box 12 at all? Does the tax software even ask for this info? And which is generally better - traditional or Roth? I've always done traditional but wondering if I should switch.

Box 12 codes are reported on your W2 for information purposes - they help when verifying contribution limits and for proper tax preparation. Most tax software will ask about these codes because some have specific tax implications. Whether traditional or Roth is better depends on your situation. Traditional gives you tax savings now, while Roth gives you tax-free withdrawals later. Generally, if you think your tax rate will be higher in retirement than it is now, Roth is beneficial. If you believe your tax rate will be lower in retirement, traditional might be preferable. Many people choose to have a mix of both for tax diversification.

Is this like an AI thing that explains tax forms? Does it actually work with complicated situations? I have a mix of traditional, Roth, and after-tax contributions through my mega backdoor setup.

I'm always skeptical of these tax tools. How does it handle state tax differences? I live in a state that doesn't follow federal treatment of retirement contributions.

It uses AI to break down tax documents and gives personalized explanations. It definitely handles complex situations - it actually explained the nuances of my RSUs and ESPP sales which was super helpful. For state tax differences, it recognizes state-specific rules. I'm in California which has some quirks with certain deductions, and it pointed out where CA tax treatment differed from federal. It basically flags when you need to pay attention to state-specific rules.

How does this service actually work? Do they just call the IRS for you? Couldn't you just put your phone on speaker and wait?

This sounds like a scam. No way you can "skip" IRS hold times. Everyone has to wait in the same queue. Probably just charging for something you could do yourself.

They use an automated system that waits on hold for you. When an IRS agent picks up, they call your phone and connect you directly - so you don't have to sit there listening to hold music for hours. I was skeptical too at first, but waiting on hold for 3+ hours wastes so much time. This way I could go about my day and just get a call when an actual person was on the line. For me, the time saved was worth it, especially during tax season when hold times can be ridiculous.

Can you explain more about how this impacts qualification for Roth IRA? I'm right on the edge of the income limit and not sure if I should switch some of my Roth 401k to traditional to get under the limit.

Sure. For 2025, the income limit to make a full Roth IRA contribution starts phasing out at $149,000 for single filers and $234,000 for married filing jointly. If your income is near these thresholds, switching some of your 401k contributions from Roth to traditional can lower your MAGI and potentially allow you to contribute to a Roth IRA. For example, if your MAGI is $152,000 as a single filer and you convert $5,000 of your Roth 401k contributions to traditional, your MAGI would drop to $147,000, putting you below the phase-out threshold and allowing a full Roth IRA contribution.

Most tax software has a "forms view" option where you can see the actual tax forms instead of just the interview questions. Look for that option in H&R Block. Then you can compare your W2 Box 1 amount (which already has traditional 401k deducted) to what appears on line 1 of your 1040. That should help you visualize it.

This is such a helpful explanation! I never thought to compare my paystubs to my W2 like that. I'm pretty new to understanding taxes beyond just plugging numbers into TurboTax. So just to make sure I understand correctly - with traditional 401k, my employer is essentially reducing my taxable income before calculating withholdings each paycheck, which is why I see less tax taken out? And with Roth, they withhold taxes on my full salary amount, but then I don't owe any taxes on that money when I withdraw it in retirement? I'm trying to decide which route to go for 2025. I'm 28 and just started making decent money ($85k), so I'm wondering if Roth might make more sense since I'll probably be in a higher tax bracket later in my career?

@Oliver Fischer You ve'got it exactly right! Your understanding is spot on. With traditional 401k, your employer reduces your taxable income before calculating withholdings, which is why you see less tax taken out each paycheck. With Roth, they withhold on your full salary, but you get tax-free withdrawals in retirement. At 28 with an $85k salary, Roth could definitely make sense for you. You re'likely in the 22% tax bracket now, and if you expect to earn more later in your career which (sounds likely ,)you could easily be in the 24% or higher brackets when you retire. Plus, you have decades for that money to grow tax-free. That said, consider doing a mix of both if your employer allows it. Maybe 70% Roth and 30% traditional? This gives you tax diversification - some money that s'already been taxed Roth (and) some that will be taxed at withdrawal traditional (.)This flexibility can be really valuable in retirement when you re'managing your tax situation. The general rule of thumb is: if you think your tax rate will be higher in retirement than now, go Roth. If lower, go traditional. But having both gives you options.