6 Provisions Affecting Your 401Kfor Railroad Retirement

Transcript:

Learn what's coming down the track for your 401k in Railroad Retirement. Welcome everyone, to another edition of the Highball Advisor's Railroad Retirement Whiteboard. My name's John McNamara of Highball, and today we're going to talk about your 401k, right? We understand it's a big part of your retirement planning, that nest egg. So, what we're looking at is big changes regarding the rules and regulations that have gone through Congress. All right? So, what has been proposed already has passed through the House, so, and it passed overwhelmingly, so this tells me that something's going to get done and it's going to be very close to what the House passed. All right? We're just waiting on the Senate to pass it, but it passed, like a 90% vote. So, it's kind of an updating of the Secure Act, and really how distributions and how you fund your 401k, and how you take out withdrawals.

So, I'm going to go through the six points that I see coming out that's going to affect you as railroaders on your 401k. Let's just walk through this. So the first one up, right, is the age for required minimum distribution. It's going to rise to 75, right? So, just to refresh, required minimum distributions, otherwise you see the acronym RMD, is money that you have to take out, a certain amount that you have to take out every year once you reach a certain age, and currently it's at 72. All right? Because at the end of the day, right, the government has given you this tax break. You now have a tax deferred 401k. They want their money, so they're saying at 72, you've got to take the money, start taking the money out. So. They're going to raise that to 75. So, that's a good one, because that gives you a little longer advantage of planning for Roth conversions, which is nice.

The second one is the RMDs. Okay. The penalty. So, what happens is, if you don't take out your distribution every year, when you're required to, 72 and above, it's a 50% penalty on there. So, they're going to reduce that penalty to 25%, and if you fix it quickly and just say, "Oh, it's quick oversight," get it done beginning of the following year, it will be a 10% penalty. So, I guess that's kind of good, right? Little savings there. So, third one up here is the catch up provision, right? So, currently, if you're over 50, they have that catch up, where you could put an extra $6,500 into your 401k to boost it up. Well, they're going to move that up for 50 and up to increase to $10,000. Right? So, especially, a lot of railroaders might retire at 60, so you only have like really 10 more years to fund that 401k per se, so you can really start trying to jam as much cash as you can in there.

However, while that's great, the next one kind of hurts it a little bit. Right? The catch provision would be subject to Roth treatment, so basically what that means is you're going to have to pay, if you want to do that extra $10,000, that's going to be after tax dollars. Okay. So ,you can't get the tax deferral on that. So, even though it's a larger amount, it's going to have to go into the tax free. You're going to have to pay the taxes on it, right? So, it's after tax catch ups only, right? So, that's what that means. You're going to have to pay the tax on that catch up, right? Because, at the end of the day, if we could just step back, this is all about the Congress and the federal government trying to get as much money as possible in the short term, right?

They're not known for looking, "Hey, let's look, 20, 30 years down the road." No. Right? Otherwise, maybe Social Security would be fixed. That's another video. But the point is, they're trying to get as much revenue as it can. So, hey, we'll give you, you can take a bigger amount, but you got to pay your taxes up. All right. Now, this is another good one here, is employer matching contribution can be a Roth contribution, right? So, right now, some people will have a match from their 401k, and that will always be in the tax- deferred and the company matches them. However, you can get a match now from the company into your Roth, a Roth 401k, if your company offers it. Most companies do. Okay. However, what you have to watch out is that match is going to be considered income to you.

All right? Then that's taxable also. So you get the match, but you're going to have to pay the tax on that right away. So, the that's something you want to look at, and I always say with Roth, you got to, see, this is the important of tax planning, is understanding what is your current tax rate, and what do you plan on your tax rates being in retirement? So, that's how you want to play the tax-deferred Roth contribution game. All right. Then, number six here is the creation of a savings and loss and found database by the Department of Labor for 401ks. Right? So, some railroaders might have been working at an old job two, three years, contributed 401k, lost track of it. Can't find it. I know that I've, that's happened to me. I've been not been able to find some for some old clients, believe it or not.

They're difficult to find. Is, they'll create a database for that, and then you'll be able to track it down. Hey, listen, that money may have been in an S&P fund 20, 30 years ago. That could be a significant amount of money. So, they'll have that up and running in two years. So, these are six things that expect to happen probably by the end of this year, they'll probably get signed into the law, something along those lines. We'll update it as long as you go. So, I hope you found this video helpful. Feel free to reach out to me if you have any really concerns about the 401k, how that should be used, Roth, traditional, all those type of things. But, I go through that in my Boarding For Railroad Retirement process. So, sign up for that, especially as you're nearing retirement. Really great stuff there. Subscribe to my YouTube channel. Click on the notification bell to get the latest updates. Until next time, everyone, please stay safe. Stay on track, and take care. So long, everybody. Bye.

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