To Ease Pension Tension, Fund Your 401(k)

That may sound good, but even that won't be enough for many workers when inflation and the rising cost of medical insurance and care are factored in. And for those with no pension, the picture is even grimmer.

But it's not hopeless, the study found. If workers who have only a 401(k) plan boost their contributions by 2 percentage points -- to 10 percent -- they can reach a level very close to what they need to keep their pre-retirement standard of living, it concluded.

Workers lucky enough to be maxed out on their k-plans should look at the Roth IRA next, experts say.

A Roth would be preferable to a traditional IRA because it's unlikely in these circumstances that you're eligible for a deduction, a key benefit to a traditional IRA, and withdrawals from traditional IRAs are taxed at ordinary-income rates. Indeed, experts say, with no deduction you might as well save in a taxable account where you get low rates on dividends and long-term capital gains.

But the Roth IRA goes one better. While you don't get any tax deduction for contributions, withdrawals are tax-free. The 15 percent top tax rates on capital gains and dividends are nice, but they don't beat having no tax at all.

The hitch with Roth IRAs is the income limits that bar many well-off workers from participating. Couples with adjusted gross incomes of more than $150,000 ($95,000 for a single) can't make a full contribution, and couples earning over $160,000 ($110,000 single) can't contribute at all.

But next year well-paid workers will get, assuming their employer cooperates (and many won't), a way around the Roth IRA limits. It's the Roth 401(k), which works more or less like a regular 401(k) but is funded with after-tax dollars rather than pretax. But withdrawals in retirement are tax-free.

Those worried about taxes in retirement may be interested in the Roth 401(k). As with the Roth IRA, rules during retirement are very simple -- take it out if and when you want to, tax-free, or leave it to an heir for tax-free income. On the other hand, unless Congress extends it, the Roth 401(k) ceases to be allowable after 2010, so you may get only five years of contributions. Still. . . .

This may all seem a bit complicated, and of course it is. But don't let that discourage you. At 8 percent a year, which you might get in stocks over the long run, every $100 you put in next year will be worth a bit over $1,006 after 30 years. In 40 years it would be worth $2,172. Get started.