Anya Kamenetz Generation Debt

In last week's column, we talked about the ins and outs of participating in your 401(k). But as many readers pointed out, not everyone has the advantage of an employee-sponsored retirement plan, with or without a match.

In fact, only 55 percent of Americans working full-time had one in 2006. And part-time workers, freelancers, independent contractors, and those with lower incomes are the least likely to have a 401(k). That means it's vitally important that workers in their 20s and 30s, who are most likely to fall into all of these categories, understand the basics of the Individual Retirement Account (IRA).

Just like a 401(k), an IRA has an annual limit on contributions, a tax benefit, and a penalty for early withdrawal before age 59 1/2. The main difference is, instead of going through your company's Human Resources department, you can open an IRA on your own at any time with a brokerage firm like Fidelity, Vanguard, or T. Rowe Price.

To get answers to some commonly asked questions, I talked to Galia Gichon, an MBA in finance who runs an independent financial education firm called Down to Earth Finance and is the author of the My Money Matters personal finance kit. Here's what you need to know about the different types of IRAs, and how to get started.

If you're less than five years out of school and looking at retirement planning, good for you! The Roth should probably be your first stop. It has a unique benefit structure that is recommended for earners at the beginning of their careers: You don't get to deduct the contributions when you put them in, but when you take out the earnings at retirement, they are tax free.

A Traditional IRA is similar to a Roth, except that, like an IRA, you get the tax deduction when you make your contribution each year, rather than when you take the distribution at retirement. You can also withdraw contributions from your Roth IRA without penalty. That's why the Roth is more commonly recommended, especially for young people.

"I am a huge fan of the Roth," says Gichon. "The only thing I don't like about it is that you're capped."

Annual contribution limits for both the Roth and Traditional IRAs are currently $5,000, going up every year or so. That means if you anticipate hitting above $50,000 in income, you should learn about the other types of retirement accounts as well so you can continue to make the recommended 10 percent retirement savings threshold.

The Roth has an income cap as well -- currently, if you earn over $105,000, you can't make contributions to it. Of course, if you earn that much, you should be saving more than $5,000 a year, anyway.

Let's say you've graduated from the Roth, or you just have more aggressive savings goals. If you're filing any 1099s (the tax form for freelance or self-employment income), the best option is a SEP IRA, which Gichon likes because of its generous limits.

"You can put away a lot of money pre-tax -- up to 25 percent of your income or up to $46,000," she says.

It can be a challenge to keep your retirement plans straight with the many transitions people go through in the first five to 10 years after college.

"I see so many people who come to me and have four or five old 401(k)s," says Gichon. "Think about how often we move, every year or every other year. I've heard of people who've lost the money just through moving. Or sometimes companies go out of business and your money is lost."

Not only does this get confusing, and not only is there a risk of losing the money altogether, but Galia points out that, if your investments are scattered over several accounts, "You're not really managing your money."

Sometimes people are afraid of incurring a penalty (10 percent of the balance, plus taxes owed on the earnings) if they cash out a 401(k) early. But you don't have to pay a penny of that. That's where the rollover IRA comes in. First, designate one brokerage that you want to work with from now on. There's no reason to be getting statements from more than one firm each month.

"Call your new brokerage and say, 'I have an old 401(k) and I want to consolidate it,'" says Gichon. "They pretty much hold your hand through the process."

Then, contact your old employer's HR department or call the number on any statements you receive, and tell them you want to set up a rollover. You're going to want a distribution check made out to your new brokerage, with your name and new account number on it. At worst, if you get a check made out to you, you have 60 days to deposit it in the new IRA without incurring the penalties. It's important to note that the rollover IRA must be a traditional IRA, not a Roth, because the tax structure matches that of the 401(k).

How? How Much? Where?

If you're reading this and don't have any kind of retirement savings plan, do yourself a favor and set up an IRA with your tax refund. In most cases, you need at least $2,500 to open an IRA, because that's the minimum for holding at least one mutual fund.

But Gichon says some companies, like T. Rowe Price, will let you open an IRA with just $100 if you agree to set up a monthly contribution, which is an excellent idea in any case. The more automatic, the better. Just set up a transfer from your checking account; you can do it online.

How much should you contribute? Gichon likes the 10 percent rule of thumb, but she's also a big fan of calculators like the one here.

"It's a rough estimate," she says, "but a very helpful guide."

When I crunched the numbers, the results I got were that I need to save 6.7 percent of my income for retirement; like Galia, I aim for more than twice that.

And finally, where should you put the money? Gichon is a fan of life-cycle or target-date retirement funds; she says they make it easier to diversify if your overall account balance is low.

"Normally," she says, "you'd need at least four mutual funds for a diverse portfolio; a large-cap, a small-cap, international, and bonds."

Gichon believes, and I agree, that the key to good money management is keeping things simple.

"You go to the doctor once or twice a year," she says. "Look at your finances once or twice a year."