Not long ago I was asked what is the best option for a recent college graduate to save for retirement if their employer doesn’t offer a plan at work. The parent was rightly concerned. Most people don’t save for their later years unless they have access to an employer-sponsored retirement savings plan.

“Many young adults are establishing their financial self-reliance, starting families, and saving down-payment money for their first homes, often while burdened with student loans,” write Rob Arnott and Lillian Wu, partner and vice president research, respectively, at the money management firm Research Affiliates. “As a result, young adults have different saving incentives from those who are further along in their careers: their savings are precautionary (to offset income uncertainties), not for retirement.”

The answer for young employees wanting to save for retirement on their own is the Roth IRA.

A Roth IRA is funded with after-tax dollars. The money compounds sheltered from taxes and, when withdrawn in retirement, any investment gains are tax free. The big advantage of a Roth for young adults without access to an employer-sponsored retirement savings plan is that contributions can be withdrawn without tax consequences or early withdrawal penalty. Just don’t touch the investment gains, which are subject to both income tax and penalty if taken out before age 59½. A Roth is like an emergency financial backstop to regular savings. The money is accessible and the retirement savings compounds over time.

Here are the contribution rules for 2019. The maximum that can be put into a Roth IRA for 2019 is $6,000. (Workers 50 years and older can contribute an additional $1,000.) To contribute the maximum, modified gross adjusted income must be less than $122,000 if single and $193,000 if married and filing jointly. Contribution limits above these amounts phase out. You can’t put any money into a Roth once the income threshold of $137,000 for singles and $203,000 for married, filing jointly has been reached.

I would put Roth savings initially into low yielding but safe assets such as federally insured certificates of deposit or a money market fund primarily invested in U.S. Treasury bills. This way the savings is available if needed without worrying about market risk. Once a comfortable financial cushion has been built, future savings can be invested in a diversified portfolio, including a low-fee broad-based equity index fund.


Chris Farrell is senior economics contributor, “Marketplace,” commentator, Minnesota Public Radio.