Skip to main content

Just starting out in the workforce? Time to think about retiring.

For young and part-time employees saving for retirement must be a priority from work day one, experts agree.

If there is no 401(k) option offered at your job, that's no problem. One option is an Individual Retirement Account (IRA), either a Roth IRA or a traditional IRA.

There are tax benefits that exist for both traditional and Roth IRAs, says Stuart Ritter, a certified financial planner with T. Rowe Price. “If you invest $100 in a mutual fund that earns $5, you get a 10-99 form saying you owe taxes, but if the money is in an IRA, you don’t get the form,” he says. In other words that $5 would not be taxed.

The key difference between these two accounts is that a Roth IRA is a deferred savings account that is paid for with after-tax money, says Daniel R. Solin, author of The Smartest Investment Book You’ll Ever Read: The Simple, Stress-Free Way to Reach Your Investment Goals. So long as withdrawals occur after the age of 59½, the account holder will not be taxed ON THEIR EARNINGS as they would be when making withdrawals from a traditional IRA. Account holders can also withdraw funds without penalty, if they use the funds for a qualified first-time home purchase (up to a $10,000 lifetime maximum), or if they become disabled. (If the account holder dies, distributions are made to their beneficiary.)

Roth IRA owners can withdraw their contributions at any point, as long as the account has been open for at least five years. “If you contributed $20,000 to your account, you can take that $20,000 out without penalty,” says Solin. “With a Traditional IRA, there is a 10% penalty, and the amount is subjected to ordinary income.”

But not everyone qualifies for a Roth IRA. Unlike with a traditional IRA, an income limitation exists regarding Roth IRAs. For the 2008 tax year, those listed as single with a modified adjusted gross income (MAGI) of more than $101,000 or are filing jointly with an income of more than $159,000, then you are not eligible to make the full contribution of $5,000 per year to a Roth IRA. To qualify for partial contributions, a person who files as single must not have a MAGI that exceeds $116,000 and a joint filing can be no more than $169,000.

A Roth IRA can be opened at any age, as long as the person opening it reports their income to the IRS.

“If a kid earns $1,000 from a summer job, they can contribute that to a Roth IRA,” says Ritter. “The IRS just needs to know about the earnings.”

Adds Solin: “It is an [investment] I recommend to young people."

And for those young employees who have access to a 401(k), Solin recommends they don’t rule out other options, too. “Even if they have a 401(k) that allows for a maximum contribution of $15,500 a year, they should very seriously consider a Roth IRA,” says Solin. “Put in the minimum amount for a 401(k) to get a matching employer contribution, [and look into the other options].”

The Roth IRA usually provides more investment options than a 401(k), he adds.

While some teenagers may have trouble picturing their lives past 22, a long term advantage is unique to the Roth IRA. “When an account holder turns 70½, you take out minimum required distribution [MRD] payments so the government can collect taxes,” says Solin. “This doesn’t apply to the Roth IRA.”

“The sooner you start investing [in a Roth IRA], the better off you are,” says Ritter. “Starting early allows you to put in less money each month, and end up with the same result.”