Q. I've read your recent column in favor of dropping the 401k for a Roth. And I fully understand that one's lifetime taxes paid could be higher if 401k contributions were over-utilized. However, I've seen no discussion of the effects of the additional compound interest made from the contributions that would be obviously higher due to being "pre-tax" at the time of contribution into a 401k plan.

Do the potential tax liabilities eclipse these additional earnings as well?

In light of your recent discussions, I'm considering dropping the conventional thinking of maxing out my 401k contributions. I'm a big Couch Potato portfolio fan and invest my 401k contributions 75 percent Fidelity Spartan Total Market Index. The remaining 25 percent goes to the Fidelity Inflation Protected Securities Bond Index.

I'm currently contributing the government limit to my 401k (19 percent of my salary). I am considering reducing my contribution to just capture my company match (6 percent). After that, I would invest the maximum Roth amount. I would still have a few thousand left to invest each year.

Where shall I put it? I'm 29, still single, and would love to retire by age 50.

---M.D., by e-mail from Murphy, TX



A. You're not alone in having difficulty with the idea that future tax rates could destroy years of compounding. Compound growth, after all, is supposed to be the "Eighth Wonder of the World."

So let's do a reality check. Suppose you are in the 27 percent tax bracket and contribute $1,000 to a qualified plan. What that really means is that you have deferred $730 of current consumption to the future.

Now suppose that your $1,000 grows at a compound rate of 7 percent for 25 years, accumulating to a pre-tax value of $5,427. If your future tax rate is still 27 percent you'll have $3,962 after taxes, which looks like a big improvement on $730. But if you put only $730 aside, today, and let it grow at 7 percent it would grow to exactly $3,962.

Whether you use a tax deferred 401(k) plan or a tax paid Roth IRA plan, your saving will do the same thing if your tax rate remains the same. It will transfer consumption from the present to the future.

Unfortunately, the taxation of Social Security benefits can put an effective tax rate of 50 percent on the funds that many workers now in the 27 percent tax bracket will withdraw at retirement. So let's do the math again. The $1,000 investment will grow to $5,427 before taxes. But it will only net $2,713 of future purchasing power after a 50 percent tax. Put aside only $500 today, let it earn at 7 percent, and it will accumulate to $2,713 in 25 years.

In effect, the higher tax rate means that you are trading $730 of consumption today for $500 of consumption tomorrow, in spite of all the big numbers and compounding. Not a very good deal.

The remedy--- to the extent that there is one--- requires two steps. First: capture the employer match that will offset some of the burden of expected higher taxes. Second: invest additional retirement money in both Roth IRA and tax efficient taxable accounts. Currently, for instance, Fidelity Spartan Total Market Index and Vanguard Total Market Index funds both have significant capital losses in their portfolios. This means no capital gains distributions will be made for some time.

My personal belief: we should develop a "portfolio" of different account types--- 401(k), Roth IRA, and taxable investments so we can get access to money that can be spent with a variety of tax consequences. I say this because the real liabilities of the U.S. government--- promises made for Social Security retirement benefits and Medicare--- are far larger than the formal liabilities of government debt. The consequence will be rising tax rates.