Next stop - Roth IRA

NEW YORK (Money) -- Question: I'm 24 years old and make $34,000 a year. I've been contributing 10 percent of each paycheck to my 401(k), which my company does not match. I also put 5 percent of each paycheck into a savings account that pays 5 percent.

I also recently invested in some commercial real estate, which is earning 18 percent a year. I now find myself with a little extra cash at the end of each month. Am I on the right track here, or is there something more I could be doing, perhaps a Roth IRA? - Ryan, Philadelphia, PA

Answer: Oh, you're definitely on the right track. By getting such an early start saving money on a regular basis, you're dramatically increasing the odds that you'll have financial security throughout your life as well as a comfortable retirement.

I wish that more twentysomethings - not to mention thirtysomethings, fortysomethings, etc. - were as serious about socking away bucks as you are.

That said, there is more you can be doing to improve your situation.

As you mention, a Roth IRA is a good place to start. This year, you can sock away up to $4,000 in a Roth. (People 50 and older can throw in an additional $1,000 in catch-up contributions.) That's a pretty big sum on top of what you're already putting away. But whatever you can manage, you ought to do.

Of course, unlike your 401(k), where you're investing pre-tax dollars and thus getting an upfront tax break, the money you'll put into the Roth will already have been taxed. Still, all the earnings in your Roth will build without the drag of taxes. And best of all, after you retire you can draw money from your Roth account tax-free.

There's also a lot to be said for having money both in a 401(k) and a Roth. The reason is that they're mirror images of each other. With a 401(k), you're avoiding tax now and paying it in the future, so it works best if you're in a lower tax rate in retirement than during your career.

With a Roth, you're doing the opposite, paying the tax now and avoiding it later, which makes it a better deal if you're in a higher tax bracket after you retire.

Alas, it's hard to tell what tax bracket you'll be in 40 years from now, so having money in both these accounts allows you to hedge your bets. I refer to this strategy of keeping money in different pots that receive different tax treatment "tax diversification." And I recommend it because it can give you more maneuvering room for keeping the tax bite down when you start living off your savings in retirement. (For more on the advantages of tax diversification, click here.)

Unless you're living the life of an ascetic, I'd be surprised at this point if you still have money left to save. But if you do - or when you do in the future - you can plow your extra savings into a diversified portfolio of mutual funds in a regular old taxable account.

Granted, you won't be getting any special tax breaks, and the gains your funds rack up will be taxable. But you can lower the tax pain by investing in tax-managed funds, which are specially designed to throw off fewer taxable distributions, or index funds, which tend to be inherently tax-efficient. To learn more about these choices, click here.

Two final things I want you to think about. First, about that savings account. For now I think it's okay of you to stash money there because we all should have a reserve we can dip into in the event of a layoff or other emergency (although you may want to consider switching to a money-market fund for a shot at a better rate).

But once you've got an account balance equal to three to six months' worth of living expenses, you'll probably want to stop feeding that account and divert the money into investments, such as the mutual funds I mentioned above, that can give you a shot at higher long-term returns.

The second thing I'd like you to do is take a closer look at that commercial real estate investment. You don't say what it is, but when you say you're earning 18 percent a year, I can't help but be suspicious. At the very least, I'd want to know how this 18 percent is calculated, and then I'd want to know how long that return is supposed to last. Investments that pay 18 percent a year for any length of time these days are pretty rare.

And those that do usually involve big risks. So I suggest you make sure you really know what you own, what it's return potential is going forward and what risks you're taking to get that return.

Other than that, though, I'd have to say that everything you've told me suggests that if you continue doing what you're doing now you will be well on your way to achieving financial security and a comfortable retirement. So keep up the good work.

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