You might have too much money in your 401(k)

OK. Gut-check time! Forget for a moment where you think income tax rates should be. The real question is, do you believe that over the course of your lifetime and your kids' lifetimes that rates will be higher or lower than today's historically low rates?

If you think future tax rates will be the same as or lower than today, then you should continue to load up your traditional 401(k), 403(b) or Deferred Compensation plan since those savings vehicles give you a tax break on contributions you put in now, and you pay taxes later.

But if you have even the slightest doubt, then it's time to re-think your retirement and estate planning strategies because you already have too much in tax-deferred vehicles, such as 401(k)s, IRAs (Individual Retirement Accounts), or annuities. Although you feel great looking at your growing balance in these accounts, remember, as tax rates increase, less and less is really yours as more and more goes to Uncle Sam.

(One warning. Don't fall for the sales technique of a salesperson pushing a life insurance policy to pay the inevitable taxes that your heirs will inherit. You will simply be paying the insurance company in advance the actuarial equivalent of the payment your heirs will receive at your death, plus commissions.)

So if you feel that tax rates will be higher in the future (as we at Simply Money do), now's the time to begin diversifying the tax treatment of your future retirement income. Here is the strategy you should follow:

1. If your employer's 401(k) plan requires you to make deposits into a traditional tax-deferred account in order to get their match, then by all means do that, but only up to the amount required for the match.

2. Then, any additional retirement savings should be directed into the Roth 401(k) option (which your plan should have) and/or your own Roth IRA if you qualify. With both types of Roths, you will forego a current tax deduction in exchange for tax-free future growth.

3. After you have contributed the maximum allowable in these accounts, then use a traditional taxable investment account (such as a mutual fund, or as we recommend, an exchange-traded fund) for any additional savings you can afford to make. This account, if used properly, will take advantage of the fact that capital gains taxes are usually lower than ordinary income tax rates.

Think of this as a spectrum: on one end you'll have money that will grow tax-free, in the middle you'll have money that will be taxed at a reduced capital gains rate, and on the other end you'll have money that will be fully taxed as income. You'll have all your bases covered for whatever future tax policy the government throws at you.

The Simply Money Point

By following this strategy you will diversify the future tax treatment for both you and your beneficiaries. And when the time comes, both the Roth accounts and your taxable account should pass income tax free to your loved ones. Although Uncle Sam won't be happy, your heirs will appreciate your thoughtfulness.