My daughter, in her 20s, just got hired as a police officer and is offered a 457 deferred compensation plan by ICMA-RC. There is no matching. Should she invest in their IRA or Roth IRA which allows a max of around $15,000 or invest on her own with an IRA or Roth? I realize that individual contributions limit is $5,500 versus the higher contribution of $15,000 with the company. Not familiar if there are fees involved with the 457 but we’ve always liked Vanguard fees. My daughter has no debts, has an emergency fund of $15,000 and presently lives at home with us although will be moving out to an apartment in a few months. Should she invest in the 457 or on her own and what percentage should she save? I’ve read that people in their 20s should try to save 10-15% for retirement. Is a traditional IRA better or a Roth IRA for her? Thank you for your attention.

Terry Says:  Both!  Your daughter is eligible to fully contribute to a Roth IRA in 2016, if her modified adjusted gross income is below $61,000 (above that level the eligibility phases out until it is completely lost at magi of $71,000).  I’m assuming that even in this important and demanding job, the starting salary is below the limit.  That limit hasn’t risen in recent years, and eventually she will likely “out-earn” her eligibility for it!  So now is the time to get the tax-free Roth money growing.

It’s a good idea to start building tax-free savings — because the deduction for a pre-tax plan will mean more to her as her income increases, not as much now.  Thus, she can more easily forego the deduction by making a Roth contribution.  But she should also be contributing to the 457 to build up tax-deferred savings there as well.  And she should evaluate the investment choices of the 457 — which may be limited, and balance them with the way she invests her Roth.  She will have a much wider range of choices at Vanguard than in the 457.  But it is all part of her retirement strategy.  Also do remind her that the most important ingredient in this mix is TIME!   Time leverages money — and starting early makes a huge difference!

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