Q.   Recently, I have been reading quite a bit about the future tax effects of 401k withdrawals and the higher tax burden it might trigger on Social Security benefits. I understand that a better course of action is to contribute to your 401k to the full extent of the company match and then direct your money to a Roth IRA instead.

I have two questions about this. First, I already have about $330,000 saved in my 401k and am between 3 and 8 years from retirement. So, is it already too late for me to make this change? Second, I have been maxing out my 401k for several years.   I planned to continue until retirement. But that means I'm contributing around $11,000 a year. If I am correct, the max I can contribute to a Roth is $5,000. (I am 53; my husband is also 53 and contributed $3,000 to his Roth in 2002, with plans to contribute the maximum allowed each year).

To continue our current savings rate, what would I do with the additional $8,000 that would not be able to go to a Roth? Would I want to go back to my 401k or would I want to look for a tax efficient mutual fund? I earn about $85,000 a year. We have additional income from rental real estate that we own.

---S.S., by e-mail from Dallas


A. The first thing I would like to do is caution other readers.   The higher tax burden some people face in retirement is not universal. Less than one retiree family in five will experience this tax. A middle-income family that plans to retire soon is unlikely to be seriously affected. Similarly, an upper income family may have pension benefits and other income sources that take them through 'the band' in which up to 85 percent of Social Security benefits becomes taxable.

So who is vulnerable to this tax?

Couples like this reader and her husband. The people most likely to be hit by this tax are families that have two strong earners. They will receive high Social Security benefits. The risk rises if at least one family member has a defined benefit pension plan. Those are the combinations that are likely to produce the $60,000 total cash income that fully engages this painful tax.

The best way to check your personal vulnerability is to compute your probable future tax return. See what your tax bracket is. That's nitty-gritty work, best done by a good financial planner or your accountant.

As I've suggested to other readers, the best action is to spread your assets around several account types: 401(k), Roth, and taxable. In addition to providing cash without creating taxable events, money in taxable accounts can also be used for efficient conversions of IRA rollover accounts to Roth IRA accounts.


Q. Asset allocation using bonds, stocks, and REIT's has not worked for me the last three years. I use a 50/50 stock/bond allocation. I am thinking of using a 70 percent bond, 30 percent stock allocation. I can get bonds with 7 to 9 percent returns. With an income return of 5 to 6 percent I can reach my goals and do not have to worry about the risk in the "shock" market (terrorism, corporate theft, economy, under-funded pensions, etc.) If we are in a long-term bear market, this seems to be a prudent allocation. Please give me your thoughts. I am retired.

---B.K., by e-mail


A. It is true that you could raise your income return to 5 to 6 percent by putting 70 percent of your money in bonds. The only trouble is that you'll have substituted credit risk and interest rate risk for stock market risk because 7 to 9 percent yields are really hard to find these days.

According to Bloomberg.com 10 year Treasuries were recently yielding 3.4 percent. Even 10-year AAA rated bank and finance corporate bonds were only yielding 4.22 percent. To get 7 to 9 percent you've got to go out on a risky limb.

If you are at a 50/50 allocation, I suggest that you "stay the course."