Everyone worries about the taxes we will face in the future. Reader T.W. asks a fundamental question: "I plan to retire--- at least semi-retire--- in about 7 years. I'm 59. My company offers a 401(k) plan but does not contribute to it. I have saved a fair amount of money in mutual funds in a traditional IRA. Should I continue to invest in the 401(k), or would it be better to invest my future savings in after-tax Roth IRA accounts, so I have some savings that will not be taxed when I need them?"

The answer: This is a real concern--- but it isn't universal. Most people will avoid any problems because the standard deduction and personal exemptions are indexed to inflation. Only a small number of households accumulate so much in tax deferred accounts that their annual withdrawals will exceed their basic tax deductions.

The real decisions, however, start long before tax considerations. Without an employer contribution, 401(k) plans lose much of their appeal. While they are convenient and make our savings automatic, the ultimate benefit of a no-match 401(k) plan depends entirely on its expenses and fund choices.  Only low expense 401(k) plans are worth considering because the alternative is to use an IRA to invest in low cost mutual funds.

If you are young, have a defined benefit pension plan, other sources of retirement income or an above average income, you are likely to face future taxes that will make Roth IRA investing a very good move.

If you are older, don't have a defined benefit pension plan, expect that most of your retirement income will come from traditional IRA accounts and have an average income, you'll probably be OK sticking with the traditional IRA accounts.

Let me explain why.

We face two fundamental tax issues in retirement. The first is whether future tax rates will be higher than current tax rates. Many observers think taxes are likely to rise in the future as government struggles to deliver on the incredible promises it has made for Social Security and Medicare benefits.

If future tax rates are higher than current rates, that's a pretty good reason to pay taxes now and have tax-free withdrawals later. That makes the Roth IRA a good tool.

The second tax issue is the taxation of Social Security benefits. The threshold for the taxation of Social Security benefits is very simple. It is $32,000 (joint return) or $25,000 (single return) less  ½ of Social Security benefits. Anything over that amount triggers benefit taxation. A couple with $20,000 a year in benefits could have other income of $22,000 before triggering the inclusion of Social Security benefits in their taxable income.

Since the $32,000 and $25,000 figures are fixed, rising benefits move all taxpayers closer to triggering the taxation of Social Security benefits.

Because of this, the further you are from retirement, the more weight you should put on Roth IRA investments over traditional IRA investments.

Does this mean traditional tax deferred plans should be abandoned?

Absolutely not. We should never forget that however our income is calculated, it is still reduced by the standard deduction and personal exemptions. Both of those tax exclusions are indexed for inflation, so the amount of income you can have, tax free, rises each year.

For 2005 a single, retired worker gets a $3,200 personal exemption, a $5,000 standard deduction, and a $1,250 deduction for being elderly. That's a total of $9,450 a year, tax-free, no matter what. As a consequence, a single retiree turning 70  ½ could have as much as $258,930 in an IRA. This is based on the Uniform Lifetime Table in IRS Publication 590. This table dictates that the required minimum withdrawal is the value of the account divided by the value in the table, or 27.4. Divide $258,930 by 27.4 and you get $9,450.

For 2005 a couple filing a joint return gets $6,400 in personal exemptions, a $10,000 standard deduction, and an elderly deduction of $1,000. That's a total of $17,400 a year. As a consequence, the couple could have $476,760 in IRA accounts and not have required minimum withdrawals subject to tax. (In both cases I've assumed no other income from pensions or taxable investments.)

Bottom line, you can have a pretty good-size nest egg before you worry about taxes in retirement.