Continued: Mix it up!

Not much is certain when it comes to saving for retirement. Except, of course, that you have to save. But you have no idea how much money you'll spend, how your investments will perform or when you'll die.

Then there's taxes. The IRS can take a big bite out of your portfolio, depending on whether taxes head north or south and which retirement plan you use to lock up your money. That's why some financial advisers are hot on tax diversification -- the idea that you should sock your money away in investment vehicles with different tax treatments.

There's the tried-and-true workplace 401(k), which is funded with pre-tax dollars and then taxes are paid when the money comes out. Same with the regular IRA (although if your employer offers a 401(k), your contributions may be nondeductible).

Then there's the Roth IRA and its lesser-known workplace cousin the Roth 401(k) -- you fund both with after-tax dollars, but the money is withdrawn in retirement with no more tax owed.

The Roth 401(k) has been around since 2006, but several studies have shown that a minority of employers offer the Roth and even fewer employees sign up for it.

Maybe that's because the pre-tax/post-tax savings question complicates the mind-boggling retirement savings puzzle. With a Roth 401(k), the worker's contributions are made in after-tax dollars while the employer's contributions are made with pre-tax dollars.

Take 26-year-old Anna Lee of Minneapolis, who e-mailed me after her employer adopted a Roth 401(k) last year. Should she pick the Roth 401(k) or stick with her trusty 401(k) account?

For Certified Financial Planner Scott Oeth, the answer boils down to your tax bracket. He suggests workers in the 10 to 15 percent bracket consider the after-tax Roth 401(k) option. If your employer doesn't offer one and you qualify, open a Roth IRA, but only after you invest enough in your regular 401(k) to snatch that company match. If you're in a low tax bracket, you're not missing out on a major tax deduction today if you forgo the 401(k). And it won't cost you that much more to pay the tax now. Imagine Anna is in the 15 percent tax bracket saving $3,600 a year in a 401(k). If she switches from the 401(k) to a Roth 401(k), her biweekly take-home pay would decline by only $20, according to a study by Vanguard's Center for Retirement Research.

Keep in mind that since changing to a Roth 401(k) would raise your taxable income, doing so could cause you to lose certain tax deductions or credits.

For clients in a higher tax bracket, the answer is not as simple. "If you're young, you have all those years to accumulate dollars tax-free, but you're giving up that tax deduction upfront," said Roxane Gehle, a CFP in Wayzata with Raymond James.

That's something that Oeth, a principal with Midwest Investment Advisors in Edina, doesn't recommend for many of his higher earners. "I'd much rather have that tax deduction in hand ... than leaving 25 cents, 35 cents [per dollar of income] on the table and making after-tax contributions to the Roth," he said.

Another consideration: Where do you think taxes are headed? Given the budget deficit and the wave of baby boomers entering retirement, my guess is that taxes will skyrocket by the time I join the leisure class. If that's the case, the Roth wins, according to new research by Boston University economics professor Laurence Kotlikoff. If taxes stay the same, the 401(k) comes out ahead for most people. If the income tax is replaced by a consumption tax, Roth is the big loser.

This uncertainty is why financial advisers recommend tax diversification. Gehle's clients fill three investment buckets: a tax-deferred bucket [401(k) or standard IRA]; an after-tax, tax-free bucket [Roth IRA or Roth 401(k)], and a plain-old taxable brokerage account. That way, she can choose which bucket to tap depending on her client's plans for that year, the market's performance and the current tax environment.

If you're like me, your taxable account is a drop in the bucket. "People are so focused on the long haul in retirement, but there's a lot of things that can happen in between," said Oeth. He speaks from experience. In the years after college, most of his money was locked up in retirement plans with nasty tax consequences and a penalty for accessing the money early. With access to cash, he would have purchased a rental property.

So Anna: Hang onto that 401(k) and contribute to your Roth 401(k). Then go online and buy yourself a piece of a promising company or two in a regular brokerage account. Unless you have a crystal ball or like to gamble, it's wise to hedge your bets.

Kara McGuire writes about money. Send comments or ideas to kara@startribune.com or call 612-673-7293.