Starting a Business vs. money in Roth

Nickoli · #1 06-01-2007, 12:23 PM

Hey all,

So let me start by saying that I have been lurking in this forum for quite awhile. Everyone here is really great and I think I've learned a lot about investing and general finance just by causually lurking... so thanks for that. So the topic:

Basically, I'm 24 and make a decent income. I'm looking to open my own bar in roughly 4-5 years (possibly sooner, but that is realistic I think). In between now and then I have two goals:
1) Experience. I currently have a part-time job managing a bar for a small restaurant. It provides some additional income and also gives me hands on experience with inventories, orders, etc.
2) Capital. I need a far amount of money for start-up. I'm thinking in the 100k range. While this won't be enough to actually start the bar, it will be enough to secure partners and/or loans I think. (I have spotless credit 700+ score.)

My specific question is related to Roth IRAs. I've seen a lot of posts on these. Between my two jobs I save $1500/month after 10% salary to my 401k. Right now I have been putting a lot of this into a brokerage account and just buying index funds with the occasional individual stock purchase. I realize the benefits of putting money into a Roth, but I don't see how I can realize those benefits since I am going to need all of the capital in maybe 5 years.

Is there any argument for putting some amount (maybe 500?) per month in a Roth just realize some of those benefits?

Any other advice on raising capital quickly or specific to bar ownership if someone has that specific advice.

That was long. Thanks for any help.

Badger · #2 06-01-2007, 12:44 PM

Well, real quick- let's assume 8% annual return. If you put in $4k for the next 4 years at 28 you have $19,466. $16k which you take back out as capital for the bar and gains interest for the next 32 years. So $40k when you retire. What's more useful, that money or the extra start up capital?

BradleyT · #3 06-01-2007, 01:11 PM

You can't put $500 per month into a roth until 2010.

Shoe · #4 06-01-2007, 01:26 PM

[ QUOTE ]
You can't put $500 per month into a roth until 2010.

[/ QUOTE ]

Yes you can, you just can't do it every month of the year right now (current max is $4,000 per year).

I'd suggest putting money into the Roth if you can, and try to keep it seperate from your startup capitol (I believe after 5 years you can withdraw your initial deposits but not any earnings without penalty). You will be happy as you get older to have money just for retirement.

Badger · #5 06-01-2007, 02:28 PM

[ QUOTE ]
[ QUOTE ]
You can't put $500 per month into a roth until 2010.

[/ QUOTE ]

Yes you can, you just can't do it every month of the year right now (current max is $4,000 per year).

I'd suggest putting money into the Roth if you can, and try to keep it seperate from your startup capitol (I believe after 5 years you can withdraw your initial deposits but not any earnings without penalty). You will be happy as you get older to have money just for retirement.

[/ QUOTE ]
I was under the impression that contributions could be withdrawn at any time without penalty. I thought the 5 year rule was just another retirement for taking qualified distributions. I could be way off base here. I just skimmed IRS publication 590 and didn't find the relevant info. Maybe someone else has a link to the rules on this.

Nickoli · #6 06-01-2007, 02:42 PM

I think I have a serious misunderstanding on how Roths work. Thanks for the clarification. I will research these more. I was under the impression that I would be penalized heavily (something like 10%?) if I took any money out of the IRA prior to retirement... which is why I was hesitant to do it. If I could, in four years, just take out my contributions but keep the earning in the account, then their really is very little downside to doing this right?

Thanks. Anyone on here ever been involved in a bar startup?

Badger · #7 06-01-2007, 02:56 PM

Here, if this is correct it looks like you would not be penalized if you took out $8k of your $16k at any time.

Good luck starting up a bar. It's got a pretty brutal success rate from what I hear.

Nickoli · #8 06-01-2007, 03:18 PM

Thanks Badger. Very helpful.

The bar business is brutal, but so is the poker business right?!

mtgordon · #9 06-01-2007, 03:39 PM

Just a side note: you mentioned putting 10% into a 401k. That might not be the best place for it if your company doesn't match it. Maybe only put enough in to the get company's max match and then put the rest into Roth + Bar Fund (which is notably different than a Beer Fund).

Nickoli · #10 06-01-2007, 04:48 PM

Actually, the company I'm working at now is cool. They contribute 10% of my salary on my behalf without me putting a dime in it. If I want to contribute more than I can (unmatched)... but basically they give me 10% of my salary in free money for a 401(k).

So I take that obviously, but I don't contribute any more.