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Are You Retiring With Railroad Stock in Your 401K? Thumbnail

Are You Retiring With Railroad Stock in Your 401K?

Video Retirement Financial Planning Taxes


If you have Company Railroad stock in your 401k, you need to watch this video.

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 talk about a strategy for those railroaders who have railroad stock, their company's stock I should say to be more specific, in their 401k. And what I'm going to outline here is a strategy to reduce your taxes when it comes to taking that money out of your 401k.

This is kind of interesting. I went over this. So the compound annual growth rate for class one railroads over the last 10 years, look at these numbers, fantastic numbers. CP is 22% a year and Kansas City Southern 19.5. Well, all the way down to CM, which is almost 13.5%. Fantastic numbers. A lot of railroaders have been accumulating company railroad stock in their 401k through all those years and then you throw on top of these compounding numbers and you have some significant wealth being built up there, right? However, it's inside your 401k and it's tax deferred and that means the government wants their money eventually.

However, there's a breakout there. It's called net unrealized appreciation and it gives you guys a great chance to take advantage of lower tax rates. You're still going to pay taxes, but a little bit lower than the income. Let's go through it. Net unrealized appreciation. YDNUA. Appreciated stock, all right? It gets taxed. Instead of that income tax rate, it gets taxed at long-term capital gains minus the basis, which is where did you accumulate all the stock? That's called the basis. Anything above that basis gets taxed at long-term capital gains versus ordinary income tax, which were a rest of your investments would be taxed that.

Just use an example here. Married filed jointly in 2021, if you're watching the video is somewhere between 81,000, 173,000, that gets taxed at a 22% on income in between there. Long-term capital gains 15%, so that's a 7% savings right there on that. Then obviously if you're in a higher bracket, the savings are even increased a little bit more. That's something you think about. The takeaway there, or the action item is really understand your tax rates in retirement. Know what your tax rates are versus that 15%. To get below 15%, there's like a 12%, you got to be really down low and you might not even have appreciated stock, but I just put that out there. You always want to understand your tax rates at all times anyway.

What are the requirements to do the annual net unrealized appreciation? The stock must be transferred in kind. You have your stock sitting in a 401k. Now you're going to do this net unrealized appreciation, NUA, on things, let's say separation of service, maybe over age, 59 and a half, death, disability, those type of things. You got to take the stock and you got to transfer it in kind to a taxable account. That's one thing, and then you got to make sure all that money in the 40k, all those assets are all taken out in that calendar year. You got to get all that out into, it's going to be in a 401k most likely, into a IRA. Got to get all cleaned out and you only got that one year, very important. Then you must have that, like I said, that triggering event, which is separation from service, a death, that type of thing.

Now very important here is that triggering event. You only get one shot at it, so let's say you take out 50 grand and then another year later, you say, "Oh, I saw John's really cool video and I'm going to do the NUA." Sorry, you can't do it because you already took money out of your 401k so you only get that one shot.

A lot of rules on that, I really wouldn't attempt this on my own without talking to your advisor or reach out to me, we can talk about it, but it gets tricky and you could add some tax implications there, but hard work gets paid off in lower capital gains tax rates so there is an advantage there.

Shout to me if you have any questions, share this video with other railroaders, especially those nearing retirement or into retirement with those 401ks accumulated that railroad stock through the years and looking at those growth rates of those class one railroads, they've done really well, I'm sure some of these railroaders are sitting on some nice stock gains, and I like to see them pay those longer-term capital gains tax rate.

Like I said, subscribe to the channel, click on the notification bell, get the latest videos, and reach out to me when you get a chance. Till next time, everyone, please stay safe, stay on track, and take care. So long everybody. Bye.

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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.