Understand the impact of accepting a buyout from your railroad.
Welcome everyone to another edition of the Highball Advisors railroad retirement whiteboard. My name's John McNamara of Highball Advisors. And today we're going to be talking about buyouts you know, receiving one from the railroad seems to be going around a lot. You know, as railroad continues to downsize. So let's go over some of the things that you want to keep an eye on when you accept these buyouts, all right.
I found three things that I feel are very, very important and really need to be planned for. Right. It's just not a yes, no decision. You want to take these other factors in, so obviously the first thing you have got to worry about, if it is going to stop your tier two, right? Tier two, that second part of the railroad retirement annuity, really the valuable part. I, I like to say,you know, you're not going to be, it's not going to be accumulating any more, right. That multiplying effect on there. So you, once you accept that buyout, you are going to relinquish your job rights. Okay. So it's not going to be growing anymore. So that's no additional service months, right? So what you have now is what you're going to get on your tier two. So understand what your tier two payment is going to look like in retirement, is that the right amount? So you want to understand the, a tier two second thing you want to understand is the current connection part, right?
So assume you're a, you know, you accept a buyout depending upon where you are in your career, or you might go work for somebody else. And if it's a non railroader, right, you're going to lose that current connection. And what does that affect me? It means the survivor annuity is no longer there because you're now not working for a non railroad employer. So that's a, that's an important part of the buyout. Okay. And also remember you're no longer with the railroad. It starts the current connection clock. So at the end of that 30 months, right, you have to have 12 months of service within 30 months. That's going to start that clock also. So you have to worry about that .
Now, if you're retiring, right, you're taking the buyout, I'm retiring, I'm 60 and I have 30 years or whatever. I'm 62 and I have 15 years, whatever it is, if you're retiring, don't worry about the current connection, because a current connection has nothing to do with your railroad retirement annuity, right? You're collecting your railroad retirement annuity. Don't worry about the current connection. Now let's go to the third one that I've identified taxes, right? Everybody loves taxes, taxes, right? So if they say, Hey, you know, here's a lump sum of money. This represents six months or a year service. We'll give this to you now. And thanks for your service, but you know, it's time to move on. Well, what that will do is that's going to bump up your tax bracket. So you might go from a 22 or 24% tax bracket that assumes a big buyout. And now your marginal rate goes up to 32%, which means you're paying that out a lot higher. So you gotta, you gotta plan for that bump and tax practice. Right. Very, very important.
Now, if you're retiring off the buyout, okay. And let's say you're 63 or older, right. You're about to go on Medicare. You're going to have the Irmaa, right. Risks there, which means, you know, when you pay for Medicare, there's going to be that additional Medicare tax has surcharge, right? So for 63 and above, they take your last two years of income on your 10 forties to calculate that. So not only will you be paying your monthly Medicare you know part B and D they're going to pump it up, put a surcharge on that. So you have to factor that into planning also. So I hope you found these helpful. I found these three things that that you want to think about, and obviously there's other things, you know, lifestyle and all that, but these are the three things that that people really don't talk about when they talk about buyouts. But you want to, you want to put these in the back of your mind and do the math on them.
So I hope you found this helpful. Please subscribe to my YouTube channel. If you get a chance, I appreciate that click on the bell for the notifications. That's great channels going, growing at at a good pace, like to see that as always, please reach out to me if and book your boarding for Railroad Retirement assessment. It's a great guide. It's a great way to see where you are. See if you're on track, highly recommended. In the meantime, everyone, please stay safe, stay on track and take care so long everybody. Bye.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. Highball Advisors encourages you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Highball Advisors, and all rights are reserved.from Highball Advisors, and all rights are reserved.