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Save for house and retirement

Question: As a recent college grad, I'd like to say thank you for writing columns for people like me. We sure need the advice!

Answer: I try to address young people of all ages in my columns, and I get lots of mail from people like yourself (and the reader in the question below). I'm happy to do my best to help.

Question: I'm in my 20s, and I just went to Suze Orman's Web site to see what advice she offers for setting financial priorities. I was surprised that she thinks I should save for a down payment on a house before investing for retirement in a Roth IRA. How do you feel about that?

Answer: My feelings are mixed. I'd like to see you start socking away at least some money for retirement, because small amounts put aside now grow into gobs of cash later.

To her credit, Suze does recommend that your first priority should be to contribute enough to your employer's 401(k) retirement plan to take advantage of any company match. I agree with that.

But what if your employer doesn't offer a 401(k), or doesn't match your contribution? Then a Roth IRA is a great alternative. And it can do double duty as both a retirement account and a savings account for a down payment on a house.

First, a few basics. Assuming you have earnings from a job, you can contribute up to $4,000 to a Roth IRA in 2005, if your adjusted gross income is under $95,000 on a single return. And there's no tax on earnings as they accumulate inside the account.

Although primarily a retirement account, the Roth has generous rules for getting your money early. You can withdraw your "contributions" at any time, without owing income tax or a penalty.

In addition, you can withdraw up to $10,000 of your "earnings" to help buy a first home. To take advantage of this break, you have to meet what's called the five-year rule: Your Roth must be open for at least four calendar years after the year of your first contribution.

Let's assume you begin putting $4,000 a year into a Roth. Five years later, after you've contributed a total of $20,000, your account holds more than $23,000, assuming a 7 percent annual return.

You could withdraw it all, tax- and penalty-free, to buy your first home. And any leftover money would continue to grow for retirement.

Have a question about kids and finances for Dr. Tightwad? Write to Dr. T at 1729 H St., N.W., Washington, D.C. 20006. Or send the good doctor an e-mail message (and any other questions for this column) to