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Young people are facing more financial challenges than ever. With soaring student loan balances, a tough job market, and general uncertainty about their future prospects, young adults have found it difficult to figure out how to dig their way out of the hole they find themselves in -- let alone start building a financial foundation for their future.

But if you only take one step toward starting to build up some savings for the long run and have at least some earnings from a job, your first step should be to set up a Roth IRA. It's hard to see down the road, but in time, if you can set aside even modest amounts toward your future now, they'll pay huge dividends in the decades to come.

Why Roths put time on your side
Financial planners recommend retirement accounts generally because of the tax savings they offer. Instead of having to pay taxes on all your income year in and year out, IRAs let you avoid all the hassle and expense of income taxes as long as your money stays in the account. That comes at the price of penalties in most cases if you have to take money out early, but that can provide a much-needed incentive to stick with an IRA even in tough times.

What Roth IRAs add to the mix, however, is the even bigger benefit of tax-free growth throughout your career. By contrast, traditional IRAs can give you a deduction for contributions now -- but if you don't make much money, then your tax rate is already quite low, making that deduction almost worthless compared to what it might save you during retirement.

How to get started
Many young people never bother opening brokerage or mutual fund accounts because they don't have very much money to invest. But it's getting increasingly easy to open accounts with even modest amounts to start out with.

For brokers, account minimums look like they're rapidly becoming a thing of the past. Scottrade, ING Direct, Fidelity, TD AMERITRADE, and E*TRADE Financial (Nasdaq: ETFC  ) are just a sampling of the brokers that don't require any minimum investment for IRAs, making it easy for savers who are just starting out to get an account opened. Even Schwab's (NYSE: SCHW  ) account minimum of $1,000 isn't out of reach for some to open an account.

On the mutual fund front, it's rare to find a true no-minimum account. But many mutual funds will let you make very small initial contributions of $50 to $100 if you commit to adding more money on a monthly or quarterly basis. By setting up automatic contributions, you can get access to mutual funds you otherwise would need a higher minimum investment to get into, and it can also help impose some discipline on your saving process.

What to invest in
As easy as it is to use traditional mutual funds to invest, I think your first Roth IRA investment should be an exchange-traded fund. ETFs can help you minimize your ongoing money-management costs, and many brokers offer commission-free ETF investing -- a crucial element for making ETFs work in small-balance accounts.

A broad U.S. stock-market ETF can start you off on the right foot with diversified exposure to some of the biggest companies in the world. Vanguard Total Stock Market ETF (NYSE: VTI  ) is available commission-free from both TD AMERITRADE and Vanguard and boasts annual expenses of just 0.06%. Most other brokers that offer ETFs have a similar fund in their lineup.

From there, it's easy to expand to other types of investments. Vanguard Total World Stock (NYSE: VT  ) expands your investing horizon to cover stocks around the world. If you want to add bond exposure to your portfolio, then Vanguard Total Bond Market (NYSE: BND  ) is just one of the viable choices you can use. With many brokers offering dozens of different commission-free ETFs to choose from, you should be able to put together a very precise portfolio that meets all your needs.

Start today!
Thinking about your future when you're struggling just to meet your present needs may seem like a luxury you can't afford. But when you think about it, you really can't afford not to start providing for your future. A Roth IRA makes that both simple and profitable by getting time working on your side for a change.

Eventually, a Roth IRA can go beyond ETFs to include individual stocks. To see what kind of stocks you should think about when you get to that point, let me suggest taking a look at the Motley Fool's special report on long-term investing. Inside, you'll find some great ideas on stocks that will serve you well over the years. Click here and get your free copy right now.

Get the scoop on the best discount brokers for your needsfrom the Fool's Broker Center.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter here.

Fool contributor Dan Caplinger didn't have Roth IRAs to use when he made his first investment, but he does still own that first fund. He doesn't own shares of the companies or ETFs mentioned in this article, although he does own similar ones. Motley Fool newsletter services have recommended buying shares of TD AMERITRADE and Schwab, as well as creating a bull put spread position in TD AMERITRADE. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy always finishes first.

Read/Post Comments (5) | Recommend This Article (19)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 07, 2012, at 1:51 PM, shapsra wrote:

    The article fails to mention that it is crucial to automatically reinvest the dividends/ST gains/LT gains. You usually have to actively choose this option, whether by "DRIP" or some other option. Down the road, unless rules change, there will likely come a day when you cannot add money to your Roth IRA. Reinvested dividends are the way you can freely reinvest without having to pay any commissions down the road and not to mention add to your compounding returns.

  • Report this Comment On May 08, 2012, at 6:51 AM, PerryDawg wrote:

    To shapsra...

    "There will likely come a day when you cannot add money to your Roth IRA".

    What do you mean by this? Please explain.

  • Report this Comment On May 08, 2012, at 9:24 AM, rossirina wrote:

    Everybody tells us that we should start saving for retirement as early as possible. I got extra educated by Well, by now I am convinced.

    The main reason it works for all qualified retirement plans (including Roth IRA):

    • You keep all realized gains (you don't share them with Uncle Sam every year) thus you grow your wealth faster

    Two other benefits that do not apply to Roth IRA are:

    • You receive a gift from your employer called "employer match"

    • Let say you want to save $1,000 and you are effectively paying 10% taxes (=$100); with IRA, 401k, 403b you make the full $1,000 work for you instead of only $900 in the Roth IRA alternative.

    If you have a 401k, 403b or a similar program I believe that you should first max contributions up to the employer match point and only then continue to save in a Roth IRA.

  • Report this Comment On May 09, 2012, at 1:18 PM, TMFDarwood11 wrote:

    Good article, and I agree that a Roth IRA should be a savings priority.

    If the reader is covered by a retirement plan at work, your modified AGI may limit your contributions to a Roth IRA. Here's the IRS link:,,id=1882...

    I'm at the point where I should be retired, but I'm still working and I will max out my Roth IRA contribution for 2012 and ditto for the spouse. In fact, at this point, I'll take other savings to fund it if necessary. I feel that strongly about the benefits. Caveat: one can only fund with money earned via wages, but in theory, if anyone over 50 who earns $6,000 in taxable compensation for the year can put all of it into a Roth IRA, or up to $5,000 if younger.

    If anyone has any doubts that taxes will increase in the future, then I suggest you sit back and watch. However, I am planning that they will and a Roth is an excellent means to minimize taxes.

    Of course, the government may change the rules in the future. I fully expect it will and not to our liking if deficits and government negative cash flow continues.

  • Report this Comment On May 31, 2012, at 10:23 AM, tad40 wrote:

    This would have been great advice years ago. However, these days there is growing concern that the government may move to takeover retirement accounts, including IRA's, 401Ks, 403bs and pension plans. Check out: Here's Why I Will NEVER Put My Money in a 401K or IRA Catherine Austin Fitts on YouTube:

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