Retirement planning while still in your 20s

NEW YORK (CNNMoney) -- My fiancé and I are in our late 20s and we contribute to our 401(k) plans. But we'd like to supplement our retirement savings by making additional small contributions (maybe $100 a month) over time. We wouldn't touch this money except in an absolute emergency. Any suggestions? -- M. Barber

Sure, nothing I'd like more than to help out a young couple eager to get a leg up on their retirement planning.

Before you embark on any supplemental retirement savings plan, though, I recommend that you first set up a bona fide emergency fund, if you don't already have one. By bona fide, I mean a stash of three to six months' worth of living expenses sitting in an FDIC-insured savings account or short-term CDs.

Granted, even if you find the best-paying options, you're not going to rack up amazing returns in this account. But the point is to have a totally secure reserve you can dip into for emergencies and such, so you don't have to break into retirement accounts that should remain invested for the long term.

Once you've got that emergency fund taken care of, you can then turn your attention to supplementing your retirement savings. On that front, the first option you and your wife-to-be ought to consider is opening Roth IRA accounts. Provided your income doesn't exceed the income eligibility threshold, you can each sock away as much as $5,000 a year in a Roth IRA.

In fact, even if your income is too high for you to do a Roth, you can take the back-door route by contributing to a nondeductible IRA and then converting to a Roth IRA.

Although the end of the year is rapidly approaching, you still have plenty of time to get money into a Roth for the 2011 tax year. As long as you contribute by the tax filing deadline -- April 17, 2012 -- you can stipulate that your contribution count toward 2011, which would allow you and your fiancé to contribute for 2012 as well.

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A Roth IRA offers a couple of advantages for a young couple looking to fatten their retirement coffers. Although I certainly don't recommend dipping into your Roth before retirement, one neat benefit to a Roth IRA is that you can withdraw your annual Roth contributions at any time without paying a tax or penalty.

So in a truly extreme situation -- say, your emergency reserve runs dry and you have no other resources -- you could pull out your original contributions without raising your tax bill for that year. (Beware, though, that you would owe tax if you withdraw investment gains from the account, and possibly a 10% penalty on those gains, unless you qualify for an exception.)

The other advantage: Unlike with a traditional deductible IRA, which gives you a tax break upfront but taxes withdrawals, you invest after-tax dollars in a Roth. So you forego the immediate tax benefit in return for tax-free withdrawals down the road (although you do have to meet certain criteria for those draws to escape taxation).

That Roth deal -- pay the tax now instead of later -- is likely to be a good one for a young couple with prospects, as chances are you'll face a lower tax rate today when your earnings are probably at their lowest point than you will when you're ready to pull money from your retirement accounts. In effect, you'll be arbitraging tax rates in your favor, or paying tax when the rate is low and avoiding it when the rate is higher.

Given Congress's habit of changing tax rates, however, it's hard to know for sure what tax rate you'll face in the future. But that's all the more reason to practice "tax diversification," which is a fancy term for spreading your savings among a variety of accounts that receive different tax treatment.

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Since you're already contributing to a 401(k) -- withdrawals from which will be taxed at ordinary income rates -- it's a good idea to also have some money in a Roth account that offers tax-free withdrawals. That way, if tax rates rise, your entire nest egg won't take a hit.

If you just don't feel like dealing with the nitpicky Roth regulations -- or if you and your wife get to the point where you can fund your 401(k)s, your Roths and still have money left to save -- you can also invest in a regular old taxable account.

Of course, you'll owe taxes on any interest and realized gains your investments generate. But you can minimize the drag of taxes by sticking to tax-efficient options like index funds and tax-managed funds.

One final note: Many fund firms and brokerage houses require a minimum initial investment for IRAs and other retirement accounts, not to mention minimums to invest in specific funds. Such hurdles may narrow your choice of investments somewhat, at least until you build a critical mass in your Roth. But with a little shopping around you should be able to open an account and find suitable investment options.

Schwab, for example, sets a $1,000 minimum for Roth IRAs. But you can open an account with just $100 if you agree to invest an additional $100 a month, and you can also choose from a number of broadly diversified stock and bond funds that minimums of just $100.

So I applaud your plan to throw some extra dough into your retirement savings. And I suggest you act on it sooner rather than later, since an early start can have a big payoff.

For example, a $100 monthly investment in a Roth IRA over the next three-and-a-half decades that earns a modest 6% annual return would grow to nearly $140,000 tax-free, or almost $280,000 for your two Roths combined. Add that supplement to whatever you also manage to accumulate in your 401(k)s, and you're probably looking at a pretty comfortable retirement.