8 Ways to Help Railroaders Reduce Taxes on Railroad Retirement

Discover these eight strategies for minimizing taxes on your railroad retirement income. Welcome to another episode of Highball Advisors Railroad Retirement whiteboard. I'm John McNamara from Highball Advisors, and today we're diving into ways to reduce taxes on your railroad retirement income. Whether you're currently receiving your railroad retirement annuity or planning for it in the future, these strategies can make a significant difference. Let's dive in and explore how to make the most of your retirement funds while minimizing tax burdens.

First, let's review how taxes are calculated on your railroad retirement income. For married couples filing jointly in 2024, any income over $44,000 is subject to taxation, with 85% of the tier one portion being taxable. The tier two portion is taxed as ordinary income. Additionally, for retirees between 60 and 62 with 30 years of service, the non-social security equivalent benefit is also taxed as ordinary income.

Now, let's delve into the strategies:

1.    Efficient Asset Withdrawal: When withdrawing funds from your various accounts (taxable, tax-deferred, and tax-free), prioritize withdrawing from taxable accounts first, followed by tax-deferred accounts, and finally tax-free accounts.

2.    Manage Required Minimum Distributions (RMDs): To minimize the impact of RMDs, consider strategies such as reducing your RMDs through strategic planning, making Roth contributions to shift funds into tax-free accounts, and implementing Roth conversions, especially beneficial for early retirees.

3.    Utilize Qualified Charitable Distributions (QCDs): If you're charitably inclined and subject to RMDs, consider directing your RMDs to qualified charities to avoid taxation on those funds.

4.    Leverage Charitable Deductions: If you itemize deductions, contributing directly to charities can be an effective way to reduce your taxable income.

5.    Implement Tax Loss Harvesting: Take advantage of any losses in your taxable accounts by selling underperforming investments to offset capital gains and reduce taxes.

6.    Optimize Itemized Deductions: Maximize your itemized deductions by strategically timing significant expenses like medical costs and charitable contributions to exceed the standard deduction threshold.

7.    Consider State Tax Implications: Be mindful of state tax implications, especially regarding state income tax on your railroad retirement income. Ensure that your tax preparer doesn't mistakenly apply state taxes to your tier two or non-social security equivalent benefit.

8.    Reclaim Tier Two Contributions: Understand that tier two contributions are not taxes but pension contributions that can be reclaimed throughout your retirement years.

By incorporating these strategies into your retirement planning, you can work towards minimizing your tax liabilities and maximizing your retirement income. If you're nearing retirement and want to optimize your tax strategy, consider signing up for our railroad retirement process. Stay informed by clicking the notification bell for our latest videos. Until next time, stay safe, stay on track, and take care. Goodbye for now!

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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.