Investing: Young? Working? Start a Roth IRA. Here's how

• Roth IRAs help you invest tax-free
• You can invest as little as %24100 in a Roth IRA
• Avoid bank CDs for Roth IRAs

You're out of college, you've got a job, and everyone is offering you advice. Dress professionally, your dad tells you. Don't spend too much on cable, your mom says. Beware of giant lobsters, says the guy who shouts at everyone in the subway.

But if you're simply wondering what you should do with any extra money --- assuming there's any left over after your student

loan payment -- here's what you need to do: Start a Roth IRA.

Let's start with the basics. An individual retirement account is a special account that lets you defer or eliminate taxes on your investments. You can have an IRA in nearly any financial institution -- a bank, a brokerage or a mutual fund company, to name some of the most popular IRA custodians.

A traditional IRA lets you deduct your contribution from your income, which reduces your taxes. Your earnings and your contributions are tax-deferred until you make withdrawals. If you wait until you're 59 1/2, your withdrawals from a traditional IRA are taxed at your ordinary income tax rate. If you make an early withdrawal, in most cases, you have to pay a 10% penalty on the amount you withdraw, as well as ordinary taxes.

When you contribute to a Roth IRA, however, you don't deduct your contributions. But your earnings are tax-free, provided you wait until age 59 1/2 to make withdrawals. You also must have held your IRA at least five years, but if you're just out of college, this isn't a big concern.

The Roth option is attractive for three reasons.

* Low tax rates. Federal income taxes are about as low as they will ever be. If you're in your 20s now, you'll probably be paying a higher tax rate when you're 59 1/2. If that's the case, it's better to pay taxes now than when you retire.

* Early withdrawals. You can withdraw your contributions from a Roth at any time without penalty. You can also avoid the 10% early-withdrawal penalty if you're a first-time home buyer, or if you're disabled. Or dead. But let's not think about that.

* Simplicity. When you retire, it's far easier to take tax-free withdrawals than it is to calculate what you'll need after taxes and send off estimated payments to the Internal Revenue Service.

The most you can contribute to a Roth this year is $5,500 in earned income. Folks over 50 can toss in $6,500. Those are maximums. Many financial institutions will let you open with $100 or even less.

So where should you open your Roth? As a practical matter, many people simply trot to their local banks and open an IRA certificate of deposit. But this is probably the wrong place to go.

Currently, the 1-year IRA CD with the highest yield is from Discover Bank, and offers the princely yield of 1%. Most banks offer less. At 1%, it will take you 72 years to double your money.

Furthermore, any fees you have to pay will decimate your already meager yield. And nearly all CDs have early-withdrawal penalties. "In about 90% of the cases, if your interest isn't enough to cover the early-withdrawal penalty, the bank will dig into principal," says Greg McBride, senior financial analyst at Bankrate.com. In other words, you'll lose money in a federally insured investment.

Your best bet -- assuming you're willing to take some risk -- is an IRA at a discount brokerage house, such as Schwab, or E-Trade, or a mutual fund company. You'll get a number of investment choices, most of which have no brokerage commissions.

Schwab, for example, will let you open a Roth IRA with $1,000. E-Trade has no IRA minimums. Vanguard generally requires $3,000 for an IRA, but will let you open an IRA in its STAR funds for $1,000. Fidelity requires $2,500 for its funds.

Because you're young, you're better off investing in a stock fund -- you have plenty of time to make up losses. One suggestion: The Schwab 1000 Index fund (SNXFX) has extremely low annual management fees and exposes you to the stocks of 1,000 of the largest U.S. companies.

If you'd prefer not to worry about which fund to choose, consider an asset-allocation fund, which does most of the investing for you. For example, if you're likely to retire in 2050, you might consider the Vanguard 2050 fund, which will make your investment mix more conservative as you get closer to retirement.

But the main thing is to invest, and to keep adding every year. You're not going to be able to retire on a single $1,000 IRA. The single most important factor in how much you have at retirement is how much you put in. And, of course, whether you dodge the giant lobsters. But it's best not to think about them.