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Now you understand why the IRS doesn't mind giving you a tax break now on deposits to a plan. What you are really doing is setting up a great retirement plan for the IRS! Is that really what you want to do?

There are plans available that offer a tax-free retirement income. You give up the tax savings now so you can have a retirement income free of taxes. That is how the Roth IRA works. The problems with the Roth are that the contributions are limited and the IRS will probably change it or eliminate it in the very near future. The so-called "non-qualified" plans using a life-insurance product work the same way, but without the limitations on the deposits imposed on most plans.

What it all boils down to is you really need to do your homework, examine all the different plans available and see which ones work best for you. It's not an easy task, but it's important so the person you are in years to come will be happy with the decisions you made today.

The 401(k) Vs. the Roth IRA: Why Choose Just One?

The 401(k) and the Roth IRA are two popular retirement investment strategies. Is one better than the other? Should you contribute to both plans? According to Walter Updegrave, senior editor of Money magazine, both have benefits. With a 401(k), money comes directly out of your paycheck, and your contributions aren't taxed until you withdraw it (preferably after retirement). Most employers also contribute matching funds - at least 4-6 percent of your contribution, on average.

The Roth IRA has its advantages, too, says Updegrave. Although you're investing after-tax dollars [unlike the 401(k), which uses pre-tax dollars], you can make tax-free withdrawals provided you meet certain requirements. And Roth IRA contribution limits are only slightly lower than 401(k) limits.

Updegrave's suggestion: Put money in both. "[A]s attractive as these plans are individually, they work even better as a pair. Why? Well, think about it. With a 401(k), you're avoiding tax on your contribution today, but paying tax on withdrawals in the future. That means a 401(k) works best if you think your tax rate is higher today than it will be in the future. You're avoiding taxes at a higher rate and paying them at a lower one.

"The reverse is true of a Roth, where you're paying tax on your contribution today and avoiding taxes in the future. Thus, a Roth is a better deal when you expect your taxes will be higher in the future since you're paying the lower tax bill today instead of tomorrow's higher one.

"By putting money in both a 401(k) and a Roth IRA, you're hedging your bets. I call this strategy "tax diversification" because, like asset allocation, it prevents you from making an all-or-nothing bet (although in this case, you're protecting yourself by diversifying your exposure to tax rates instead of different types of investments)."

Resource: "Which Has Priority? My 401(k) or Roth IRA?" Ask the Expert, ww.cnnmoney.com.

Stanley Greenfield, RHU, is a financial consultant and health insurance underwriter in Jacksonville Beach, Fla.