Question: My husband and I are currently on National Research Council fellowships, working at a government lab. The nature of the fellowship is such that we are neither employed by NRC, nor by the lab we work in, yet we are not required to pay self-employment taxes. Someone told me that in that case, we cannot contribute to our Roth IRA accounts either. Is this true? I'm concerned because it's the only retirement saving vehicle we have right now, since we don't qualify for a 401(k). If we can't contribute to our Roth IRAs, do you think getting Treasury I-saving bonds are our best alternatives? Thanks! Nandita

Answer: As I understand it, IRS rules prevent scholars on fellowships like yours from technically counting the money as "earned" income. So, you can't contribute to your Roth if the fellowships are your only source of income. However, if you have any part-time work (I realize that's probably unlikely given your schedules) then you can use that money to fund the Roth-IRAs.

If that's not the case, I do like the idea of investing money in I-bonds, the inflation protected savings bond. You don't pay any commissions buying and selling them. Your money compounds tax free until you cash them in. And the dollar you put in today is worth a dolla--plus interest 10, 20 or 30 years from now. The other thing you can do is also direct some money into a broad-based equity index fund, like the S&P 500, the Russell 3000, or the Wilshire 5000. That will give you an exposure to the equity market in an investment that keeps fees razor thin and your annual tax liability low.

One advantage of this home-brewed retirement savings approach--bonds plus equity index fund--is that it's easier to pull money out early. Yes, you'll have to fork over capital gains tax and income taxes, but you won't have to pay Uncle Sam the 10% penalty imposed on early withdrawals from retirement savings plans like IRAs or 401(k)s.

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