Ask Money

Getting started with retirement savings

Chris Farrell Feb 12, 2010

Question: Hi! I am a 25 year old female with an entry level, good-paying, secure job. I’m finishing my Master’s degree. I have little debt (less than $10,000 – all student loan). I own my car, and I rent my apartment.

I’d like to start some type of retirement account, but I don’t know what to do or who to contact. (My company is a small start-up, we don’t have HR people or anything. We have an insurance/financial guy, but when I contacted him, he told me that’s not what he does and he transferred me to some other guy I don’t know.)

I have about $5,000 I can put into the account to start. And I’d like to have about $100 taken from each paycheck and put into the account.

What is it that I’m looking for? What are my best options? Who should I approach about doing this? Will starting this account cost me anything? Please help, I am really, very very confused. I hear a lot about how people should start retirement accounts when they’re young, but there’s very little guidance available. Thank you! Heather, Baltimore, MD

Answer: I had just been looking at some pictures of Baltimore after the blizzard when I came on your email. When I lived in the Washington D.C. area I used to drive up to Baltimore a lot to see the Baltimore Bullets play (now the Washington Wizards). I never saw the city under such a blanket of snow. What a mess.

The good news is that your finances are anything but a mess. You really have a good financial start. I’m glad you’re looking to put some money away in a retirement savings plan. I’m assuming your employer doesn’t offer one. In that case, I would open up either a traditional IRA or a Roth-IRA. You can put a maximum of $5,000 into any either IRA a year. In either case you can invest the money in a broad array of investment options, including CDs, mutual funds, stocks and bonds. Almost every financial institution, including big banks, neighborhood credit unions, and mutual fund companies, will open up an IRA account for you.

Here’s the big difference between the two. You fund a traditional IRA with pretax dollars. In other words, you get an upfront tax break. When you take out the money in retirement you’ll pay your ordinary income tax rate on the withdrawals. Contributions for a Roth are with aftertax dollars. The money you take out in retirement is free of taxes. Even though you’re giving up the upfront tax break, the Roth is the better savings vehicle. You can’t beat tax free withdrawals.

One more reason to lean toward a Roth: You can withdraw contributions from a Roth–not any investment gain–without paying a penalty or taxes. In essence, the Roth is both emergency savings and retirement savings. If you take money out of a traditional IRA early you’ll pay both a penalty and taxes owed. (I’ve written a lot more on Roths in other posts on this Getting Personal site.)

For thinking about investing over the long haul in your IRA, I’d recommend my book, The New Frugality: How to Consume Less, Save More and Live Better and Burton Malkiel’s The Random Walk Guide to Investing. is a good online resource for getting answers to your IRA questions.

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