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Saving, investing young
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April 27, 2000: 4:56 p.m. ET
The art of balancing current debt and expenses while building a nest egg
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NEW YORK (CNNfn) - Supporting yourself while going to school full-time is a huge challenge in itself, but what if you also want to begin to build a nest egg?
In response to a reader's question, Mark Groesbeck, a certified financial planner from Houston, Texas and a member of the Financial Planning Association suggests a system for resolving current or upcoming debt while beginning to invest.
Ask the experts a question
I am a 20-year-old student with many college expenses who cannot afford to invest much. I can put about $2,000 away each year, but I may need to use that money at some point to pay for my education expenses. Should I put all of it into my IRA and if I need it, take it out through the higher education allowance? Or should I put half of it in my IRA and put the other half into another account so I will have unrestricted access to it if I need it for an emergency or school?
Before you decide between an IRA or a regular investment account, consider the following:
The foundation of your investment plan should be an emergency fund of 3-6 months of living expenses. After this goal has been met I would suggest you consider paying off any credit card debts you may have. After these items have been considered then you are ready to consider how the investment should be registered, IRA or regular investment account.
In order for you to make a Roth IRA or Regular IRA contribution you must have income from employment. If you do not expect to have W-2 Income then you would not be eligible to contribute to an IRA.
Distributions from a Roth IRA, which are "qualified distributions," are not subject to federal income tax. Qualified distributions are distributions which are made after a five-year waiting period, and which are made:
1) After the taxpayer reached age 59 1/2.
2) In the event of the taxpayer's death.
3) Because the taxpayer becomes disabled.
4) To pay for 'qualified first-time home buyer' expenses.
There is no exception for educational expenses, thus withdrawals in excess of contributions would be taxed as ordinary income and would be subject to a 10 percent penalty tax.
A Roth IRA contribution will not provide you with an income tax deduction, but earnings will compound tax free until distributed. Withdrawals from a Roth IRA can first come from your original contribution and can be withdrawn without tax. So if you contribute $2,000 to a Roth IRA and the account grows to $3,000, the first $2,000 of distributions could be tax-free.
Another type of IRA, which you may be considering, is the Education IRA. Distributions from Education IRAs can be excluded from income in the year received if you have higher education expenses. However, contributions to Education IRAs can only be made until the age of 18, and therefore, would not be an option for you.
In summary, consider your emergency fund and credit card debts before starting a savings plan. If these two items are resolved, then a Roth IRA would be a good funding vehicle to consider (assuming you have income). If you have unexpected expenses you can first elect to use your emergency fund before liquidating your Roth IRA. 
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