Dear Gary,

I definitely want to get a retirement plan going. However, I'd love for the money to be available in the meantime should we need it for college or whatever. I find it difficult to keep up with so many plans. Is there a medium that would be good for this? Something where the money would be tax deferred until such time as you chose to draw it out? What about T- bills, as mentioned in Joe Dominguez and Vicki Robbin's book "Your Money or Your Life"?
--Sherri

Sherri asks a good question. And she has many more options available to her than she did just one year ago. But with choice comes confusion. So let's see if we can't bring some of this retirement plan business down to earth.

We'll begin with the easiest part. T-bills are just a place to invest your money. In this case you're loaning money to the US Treasury, hence the name "T" bills. You can think of them as a 6 month CD issued by the government. But, they're not limited to, or specifically recommended for, your retirement accounts.

Now we'll get into the harder part. In 1997, Congress passed legislation that added new types of Individual Retirement Accounts (IRA's) that can be used for savings. One goal for the new plans was to make it easier to use the money for major expenses (like a home or college education). Fortunately for Sherri, that's just what she wants to do.

You'll remember the basics of the 'old' IRA accounts. You put some money in now. You deducted the amount you put in from your taxable income. That meant that you paid less in taxes this year. Your money grew without any taxes until you took it out. When you took it out you paid regular income taxes on the withdrawal. In addition, if you were under 59 1/2 years old, you also paid a 10% penalty.

Now you have a couple of choices that make it much easier to get to your savings if you need it. First, we'll consider what's known as the "Roth IRA". With a Roth IRA you'll put your money in now. But unlike the old IRA, you won't take a tax deduction this year. While the money is in the account it will grow without any taxes.

Here's where it gets interesting. If you're over 59 1/2 years old and the money has been in the account for more than five years, you can take it out without paying any taxes or penalties. In addition, you can withdraw up to $10,000 for a first-time home purchase. If you're under 59 1/2 and the money has been in the account for more than five years you won't pay penalties or taxes.

You may also withdraw funds for qualified college expenses. In that case, you won't pay penalties, but you will pay taxes after you've taken out an amount equal to what you put into the account over the years.

Before you go running off to open a Roth IRA, we do need to check and make sure that you're eligible. First, you or your spouse needs to have income of $2,000 (or equal to the amount that you put into the account). You also need to have an income less than $95,000 for single tax payers or $150,000 for joint filers. Finally, you're limited to $2,000 per taxpayer each year. So a couple could put $4,000 into a Roth IRA each year.

There's one other new option for you to consider. It's the Education IRA. This choice is very much like the Roth IRA. You don't get a deduction when you contribute. Your money grows without taxes. But with the Education IRA, you can withdraw the money for qualified college expenses for your children or grandchildren without penalties or taxes. Remember, that with the Roth IRA you would pay taxes on withdrawals if you're under 59 1/2.

There are contribution limits. You can contribute $500 per child each year. Even if you've already put the maximum in a traditional or Roth IRA, you can still contribute to an Education IRA. Again, the income limits from the Roth IRA apply here, too.

OK. Everyone still with us? As if that weren't enough to consider, the traditional IRA received a facelift. You can now take money out of your IRA and use it for college expenses without paying the 10% penalty. You will pay income taxes. In addition, some people who were not eligible for a deductible IRA contribution will not be able to reduce their taxable income with an IRA contribution.

So what's best for Sherri? There's no one best answer. But here are a few thoughts. If you're young and haven't bought that first house yet, a Roth IRA is probably a good choice, at least until you have about $10,000 accumulated in the account. That would reach the first time homebuyer limit.

After you've saved that much, if you have kids and hope to put them through college, you might want to shift your focus to an Educational IRA. If you're able to save more than the $500 per child limit each year, put the excess savings into a Roth IRA. In all cases, you should have an emergency fund equal to about three months of your expenses available before you start putting money in something longer term like an IRA.

As you would expect, this advice comes with the usual warnings. General information like this may not be the best for your particular situation. You should seek competent financial and tax advice before making major decisions.

One final thought for Sherri. It's easy to let the different choices keep you from doing any saving at all. That's the worst thing that you can do. Even if you have to pay penalties and taxes to get at the money, it's better to have that choice available to you than to have no savings at all. So take a look at your circumstances and get a regular savings plan started. You'll be glad you did.

Thanks to Sherri for asking a very good question.