With an individual retirement account, your savings can work double duty. By Stacy Rapacon, Online Editor June 1, 2012 Editor's Note: This story was originally published in the July issue of Kiplinger's Personal Finance magazine. OUR READER Who: Tyler Williamson, 23 Where: Gonzales, La. Question: How can I save for both retirement and possibly going back to school?SEE ALSO: 8 Reasons You Need a Roth IRA Now Retirement isn’t typically top of mind for twentysomethings. But Tyler believes it should be. “With pension plans becoming a thing of the past, I realize the importance of saving as much as possible as early as possible,” says the young refining engineer. Tyler has the resources to follow through. He joined Marathon Petroleum, in Garyville, La., a few months after graduating from the University of South Carolina in May 2011, scoring a salary of more than $75,000. Just upriver from New Orleans, it’s the nation’s newest refinery. Yet, like many Americans, Tyler worries about job security. So he would also like to bankroll a backup plan: graduate school. He figures an advanced degree would ensure or boost his position in his company and industry. Advertisement An individual retirement account would help Tyler accomplish both goals. Usually, a taxpayer younger than 59½ owes a 10% penalty on an IRA withdrawal. But if you spend the early payout on qualified higher-education expenses, the 10% ding is forgiven, although the distribution from a traditional IRA is still subject to income taxes. In Tyler’s case, a Roth IRA wins out over a traditional IRA. Because you pay taxes on the money before it enters a Roth, you can withdraw your contributions at any time for any reason without additional taxes or penalties. If you tap earnings before retirement age to cover school costs, you owe taxes on those dollars but no penalty. If Tyler leaves his Roth untouched for decades, he’ll unlock its primary benefit: tax-free retirement income. If you are 59½ and your Roth account has been open at least five years, you get to withdraw the earnings tax- and penalty-free. “It’s just like a savings account,” says Jeff Rose, financial planner and GoodFinancialCents.com blogger. “But you get this potentially awesome benefit later on.” Hedge Your Bets in Your Portfolio Tyler is young and has time to overcome market reversals, so aiming for high growth by earmarking as much as 80% of his investments to stocks and only 20% to bonds or cash would ordinarily be his best strategy. But if Tyler is also depending on the IRA for graduate-school money, he should think more like a parent who’s supervising a teenager’s college funds. In that case, Rose suggests that Tyler put no more than 60% in stocks, and maybe even less. But with interest rates so low, long-term bonds are too risky. Tyler should choose among the many short- and intermediate-term bond funds that yield about 2%, such as Vanguard Short-Term Investment-Grade (symbol VFSTX), a member of the Kiplinger 25. Advertisement That’s not much of a reward, so Tyler shouldn’t shy away from the stock market. Most experts steer beginning investors to simple index funds. Vanguard Total Stock Market Index Fund (VTSMX) charges 0.18% annually and spreads its assets among nearly all the stocks listed on the New York Stock Exchange and Nasdaq. An international index fund would be a good complement, with perhaps $1 invested for every $5 Tyler puts into the U.S. market. Follow Stacy and the whole Starting Out Kiplinger team on Twitter. Or email us at StartingOut@Kiplinger.com with your questions.