Whether you’re a career bartender building $15 drinks at a busy Manhattan bar, or a young bar-back washing and stocking glasses at a local pub, chances are you’re working hard each night to keep up the pace—and you’re also probably making cash tips. In a frenetic environment that requires your presence of mind, it can be difficult to focus on something as far away as retirement. But, as members of the service industry typically don’t receive employer benefit packages, saving for retirement is key for long-term financial security.
We spoke to a financial advisor, Steve, who has sixteen years’ experience in finance and spent a good bit of his previous working life in the service industry. Steve broke down for us the best and easiest plan for bartenders to save for retirement — a Roth IRA — and explained in layman’s terms how and when to start one (hint: as soon as possible). Read on for his advice:
What’s an IRA, anyway?
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- First, the basics: IRA stands for Individual Retirement Account. The main difference between a Roth IRA and a traditional IRA is that contributions to a Roth IRA are not tax-deductible, while withdrawals are generally (but not always) tax-free. Roth IRAs also have fewer withdrawal restrictions and requirements than traditional IRAs.
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- If you make up to $116,000 in reported income each year, you can contribute to a Roth IRA. The maximum contribution is $5,500. “The Roth IRA is a working man’s benefit,” says Steve. “In order to fund a Roth IRA, you must be under a certain income level.”
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- You must receive a W-2 to have a Roth IRA, and you cannot contribute to your IRA more than your reported income. “If you made $1,000 in wages according to your W-2, but made $5,000 in unreported tips, you could only contribute $1,000,” says Steve.
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- However, dollars are interchangeable. You don’t have to use your paycheck dollars to contribute to your Roth IRA. You only must have paycheck dollars to be eligible.
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- Roth IRAs are different for everyone, because they have options. You can leave your IRA money in cash and make no return on it. Or, you can be aggressive and buy stocks, such as in technology or emerging markets. You can also put your IRA into a diversified mutual fund, many of which have a historical trend of a 10+% rate of return each year. “But remember,” Steve adds, “past performance doesn’t guarantee future results. In the last five years mutual funds have been spectacular. Historically, you lose money one year in four.”
The “Why”
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- Roth IRAs are a little bit “magic,” says Steve. “Once the money goes in, it grows tax-free for the rest of your life. It’s a hell of a deal and is all spendable when you get to retirement.”
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- Roth IRAs are flexible. You can save as little or as much each year (up to $5,500) as you want, you can invest it any way you want, and you’re not required to put money in.
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- Contributions to a Roth IRA are always withdrawn tax-free and are available at any time. If you put money in one year and need it for an emergency the next, you can take it out of your IRA tax-free. Many other retirement plans tax your money when you take it out. “We hope you won’t take money out, because that doesn’t do you any good,” Steve says. “But, saying ‘we hope you won’t’ and ‘you can’t, or else’ are two very different things.”
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- If you wait until you meet the age and holding requirements, you can receive tax-free distributed amounts of your Roth IRA. In other words—if you are 59 ½ or older and you decide to retire, or want to supplement your income with the money you have saved, you can do so tax-free.
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- The longer the money stays in the Roth IRA, the greater the benefit of tax-free accumulation through interest. (As Steve said earlier, “it grows.”) And, you don’t have to take distributions ever in your lifetime or you can wait as long as you want, giving you more time to build tax-free wealth.
The “When”
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- As soon as possible. What you save right now is critical to your investment.
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- “Don’t put it off,” says Certified Financial Planner Margie, who works with Steve. “The power is in saving early versus later.”
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- Open or contribute to an IRA by April 18, 2016 to increase your retirement savings. For individuals in Maine and Massachusetts, the deadline is Tuesday, April 19, 2016.
The “How”
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- There are many places to open an IRA. For starters, call Vanguard, Fidelity, or Charles Schwab, open one at your bank, or talk to a stockbroker.
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- Another excellent (and free) resource is the Dave Ramsey Roth IRA Starter Guide.
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- You can also work with financial planners at banking institutions like Wells Fargo or Chase. These may be more expensive, but they often have ways to reduce those costs.
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- Have more questions? Check with a CPA, your tax-preparer, or financial advisors at your bank.
