NEW YORK (CNN/Money) - Am I better off contributing 21 percent of my salary to my 401(k) or, instead, contributing the maximum amount my employer will match (7 percent) and then investing the difference in a Roth IRA?

-- Philip Seghers, Baton Rouge, Louisiana

For those readers out there who might not be sure about how investing in a 401(k) differs from investing in a Roth IRA, let me start with a brief review.

When you contribute to your 401(k), you get an immediate tax break -- that is, the money that goes into the 401(k) isn't taxed until you withdraw it, preferably at retirement. Any earnings your contribution generates also go untaxed until you withdraw them.

A traditional deductible IRA works much the same way in that you get an immediate tax deduction for your contribution and earnings on that contribution compound tax-free until withdrawal.

A Roth IRA works in exactly the opposite way. You contribute after-tax dollars, or money you've already paid taxes on, so you don't get an immediate tax break. The earnings on your contributions compound tax-free as with a 401(k) and traditional IRA with one important difference: neither your original contributions nor the earnings are taxed when you withdraw them.

So which is better -- the upfront tax break plus tax-deferral on earnings offered by a 401(k) and traditional IRA, or foregoing the immediate tax break for tax-free withdrawals at the end?

And the answer is...drumroll please...all things being equal, these two approaches offer exactly the same benefit. That's right, there's no difference.

Assuming your investments in each type of account earned the same return, you would end up with the same amount of money after taxes in each of the accounts.

Ah, but we all know that all things are never equal. In the real world, there are differences that can make one account better than the other.

One of the main differences is your tax rate at the time you make your contribution to the account and your rate when you withdraw it. Basically, if you face a higher tax rate at the time you invest than the time you withdraw, the 401(k) or traditional IRA are the better options. That's because you're sidestepping taxes when your tax rate is higher and paying the tax when the rate is lower.

If, on the other hand, you expect the tax rate you face when you withdraw the money to be higher than the rate you face when you invest it, then the Roth IRA is the better deal. You would be paying taxes when the rate is lower and escaping the tax when the rate is higher.

If your tax rate doesn't change, then the three types of accounts are equal. (Roths have some other advantages, one of which is the fact that you're not required to make withdrawals from the account after reaching age 70 1/2, as is the case with a traditional IRA. For more on the Roth's various benefits, click here.)

Now, if we all knew for sure what tax rate we'll face in the future, we could decide whether a 401(k) or IRA is a better deal than a Roth. But we don't.

If we save a lot and pump up the balances in our 401(k) and other retirement savings accounts, it's possible our withdrawals could kick us into a higher tax bracket than we faced during our career. (Remember, with the exception of any nondeductible contributions, all the money coming out of a 401(k) is fully taxable at ordinary income rates -- and in retirement you're not lowering your taxable income by contributing to a 401(k) as you did in your career.)

Besides, there's always the wild card known as the U.S. Congress, which has been known to raise tax rates in the past. So it's very difficult to tell what rate we'll face in the future.

Which is why I'm an advocate of contribution to a Roth as well as to a 401(k) (and, if a 401(k) isn't an option, a traditional IRA). By doing this, you practice what I like to refer to as "tax diversification."

Instead of having all your retirement money tied up in accounts like 401(k)s and traditional IRAs that are subject to whatever the prevailing tax rate is on ordinary income, you also have some money in the Roth that isn't subject to any tax rate at all.

You can take this concept of tax diversification even further by including accounts with investments that generate long-term capital gains. These gains are taxed at long-term capital gains rates, which are typically lower than ordinary income rates. If you'd like to read more about tax diversification, click here.

By having different baskets of money taxed at different rates, you gain valuable flexibility at retirement time in terms of how much tax you'll pay and when you'll pay it.

So, back to your situation. I think you're absolutely right to invest at least enough in your 401(k) to get your employer's match. Doing otherwise would be like walking away from free money. Once you've done that, I think it would then make sense to fund a Roth IRA.

But be careful. One thing you definitely do not want to do is cut back on your 401(k) contribution and then somehow overlook funding that Roth IRA. When the money's not going directly from your paycheck to the 401(k), it sometimes has a way of being spent rather than invested.

You also want to be sure that you invest as much as you can in the combination of 401(k) and Roth IRA. You mention that your 401(k) plan allows you to invest 21 percent of your pay, but that the match stops at 7 percent. If you invest just 7 percent in your 401(k), that would leave 14 percent of your salary that would have gone into your 401(k) that can now go into a Roth.

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For the 2004 tax year, however, the most you can contribute to a Roth is $3,000 (although if you're 50 or older, you can put in another $500. Which means at a 14 percent contribution rate, you would hit the $3,000 ceiling with a salary of just under $21,500. If you earn more than that -- which I assume you do, given how much of your income you plan to save -- you'll have more money to save than you can put into the Roth.

If that's the case, make sure you put enough in the 401(k) so that the 401(k) and Roth savings combined soak up all the money you can afford to save.

Of course, if you can afford to save more than your 401(k) and Roth combined can handle, then by all means invest outside your tax-advantaged retirement accounts, where you can concentrate on investments that generate long-term capital gains. Come retirement time, I think you'll be glad you've hedged your tax liability.

Walter Updegrave is a senior editor at MONEY Magazine and is the author of "We're Not in Kansas Anymore: Strategies for Retiring Rich in a Totally Changed World."