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4 Ways To Save For Retirement as a Tipped Employee

Being a tipped employee can mean that your income is not consistent weekly or month-to-month. The varying income can make planning for your basic expenses, saving, and even retirement challenging. To help you save for retirement as a tipped employee, I asked thought leaders how tipped employees can save for retirement when they aren't offered benefits. From exploring tax-advantaged plans to tapping the features of cash-value life insurance, there are practical options that may help you save long-term for retirement.

Saving for Retirement as a Tipped Employee

Explore Tax-Advantaged Plans and Related Options

No access to an employer-sponsored retirement plan like a 401(k)? You can still contribute to a tax-advantaged retirement plan if your income is documented on a 1099 or W-2. The earned income could allow you to make a tax-deductible contribution to an individual retirement account (IRA). More options exist for those with income reported on a 1099 form since they are self-employed. Small business retirement plans, simple IRAs, SEP-IRAs, and solo 401(k)s allow for more contributions.

For those who work strictly under the table, remember that you must report income and pay any taxes due. You can contribute to a Spousal IRA if your spouse has enough earned income, even if you don't have reportable income. Either way, you can always save in a brokerage account and invest long-term for retirement.

- Jonathan Vander Werff, CFP®, My Financial Coach

Set Up 401(k) and Invest in ESPPs and ESOPs

There are a number of ways that you can achieve this, and many of them are quite simple. For example, you can set up a 401(k) plan at your employer or invest in individual retirement accounts (IRAs). You can also set up a pension plan if you are lucky enough to have one. All these options offer tax advantages, and you can also make contributions on a pre-tax basis. Additionally, you can use special employer contributions programs that allow you to make contributions even if you do not qualify for a traditional 401(k).

Finally, remember that you can also use Employer Stock Purchase Plans (ESPPs) and Employee Stock Ownership Plans (ESOPs).

- Paw Vej, Ltd

Limit Spending and Save

The vast majority in the USA, with handsome salaries, retire without any savings, let alone be able to survive and pay for medical and utility bills. The past 20 years were quite challenging, starting with 9/11, then the recession. Adding fuel to the fire was Covid-19, which caused many affluent people to hit rock bottom, with many well-established businesses closed worldwide. It seems impossible for tipped employees to save substantially for retirement in these terrible conditions, living below the poverty line.

However, the 21st century holds its distinct advantages. The key to success and saving for retirement is sacrificing the Now for a safe and better future. I am not suggesting working extra hours but living a simple life and minimizing unnecessary expenditures.

The tips should be considered a blessing and put in a savings bank account. This will have a snowball effect, and it will multiply with time. Following this will save a meaningful amount for a safe and prosperous future.

- Brad Eckhardt, Elite Dental Center

Tap The Features of Cash Value Life Insurance

You can set up a cash-value life insurance policy with regular premium payments. Part of the payment will go toward the policy's death benefit, while part of it will go into the cash value portion of the policy. Cash value in a life insurance policy builds up tax-deferred just like an IRA. But, unlike an IRA, you can often add much more to the life insurance contract than a traditional IRA. Also, with the new life insurance products, you can have your cash-value account linked to an outside index like the S&P 500. This allows you to earn higher interest than fixed rates, but most policies also come with a floor of zero to avoid losing any of your principal investment. Another great feature of life insurance that most people are not aware of is you can access your cash value growth at retirement by taking a policy loan. Unlike a traditional IRA, this policy loan allows you to access your value tax-free. It's a win-win scenario.

- Mike Raines, Raines Insurance Group

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