By Scott Burns

Q. My husband thinks we should always save the maximum amount possible in his 401(k) so we can get the tax benefits. We've been doing this since we got married, and are now 42 and 45. Our retirement accounts currently have about $350,000 in them. About $25,000 of that is in Roth IRAs. My husband will get a pension if he stays with his company.

I think we are setting ourselves up for a huge tax bill during retirement. He says he's never heard of anyone complaining about having saved too much. I think we should be saving more for the kids’ college (they are 14 and 12), a replacement vehicle when the time comes, and paying down the house. We currently owe $165,000 on the mortgage and have no other debt. I think we should reduce our 401(k) contributions to 6 percent (to get the match), keep doing the Roth, and add to our other savings. We are coming up on some years where we will need more financial flexibility. What do you think?---A.H., by email

A. There are two major tax traps in retirement. One is certain. The other is likely. The certain trap is the risk of paying high effective tax rates on your retirement plan withdrawals because they will also trigger the taxation of Social Security benefits. As a consequence, taking an additional $1,000 from a retirement plan may cause an additional $500 to $850 of Social Security benefits to be taxed. Instead of paying $150 of income taxes on $1,000, you’ll pay $225 to $277.50 in income taxes.

Many--- probably most--- retirees will find themselves in this miserable trap as inflation increases Social Security benefits while the threshold for taxation remains fixed. The (kind of) good news for you and your husband is that this high tax rate is likely to fall on his pension, but your retirement plan savings may escape it--- because you'll already have paid the full amount through his pension.

For you the greater worry is higher tax rates, with middle income workers being the most vulnerable. Here’s why. While the vast majority of retirees will face tax rates from zero to 15 percent, when your gross income exceeds about $88,000 (joint return), you're likely to find yourself in the 25 percent tax bracket. I think it's a good bet that a future tax increase will include a new tax step between 15 percent and 25 percent.

One way to increase your financial flexibility is to reduce the 401(k) contributions to 6 percent, capturing the full match, and applying the extra money to your home mortgage. You'll pay it off faster, and each dollar paid off will be a dollar you could access through a low-cost home equity line of credit. The interest (on amounts up to $100,000) on these loans is tax deductible, and the variable interest rate is often lower than the rate on a long-term mortgage.

Used intelligently, a home equity line of credit can help you finance education and other lumpy spending. The operative word here is "help"--- $100,000 of credit won't get most families through the college education expense gauntlet.

Q. I have $10,000 in a Fidelity money market fund that pays very little. I would like to take all or part of it and invest in another Fidelity fund (or any other fund) that gives a good return on its market investments. What do you suggest? ---G. F., by email from Dallas

A. You won't do better without taking some risk that you could lose money. The increase in income, however, could be substantial. Inside the Fidelity fund family you could move to Fidelity Mortgage Securities fund (ticker: FMSFX). It was recently yielding just under 5 percent. The fund requires a minimum investment of $2,500 and has an expense ratio of 0.45 percent. The only year in the last 15 that it lost money was 2007, when it lost 0.42 percent. Given the current dismal yield of all money market funds, the risk may well be worth it.

One of the best funds in this category will require a commission to purchase in a Fidelity account. It is Vanguard GNMA (ticker: VFIIX), with a $3,000 minimum purchase, and an annual expense ratio of 0.21 percent. Over the last 15 years it has provided an annualized return of 6.69 percent while the Fidelity fund has provided a return of 5.84 percent.