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Can I Borrow From My Railroad Retirement?


Things come along in life unexpectedly where you might need access to funds. With good planning and having an emergency fund in place to address these unforeseen circumstances is the best way to handle them. However understanding that isn’t always available for everyone, I outlines some options for you to help navigate through this difficult period. Just to be clear unforeseen circumstances isn’t I needed cash for a new car or a Disney vacation.

With that said, railroaders will sometimes turn to their railroad retirement plans for funding. I can’t stress enough that turning to your railroad retirement funds should be your last and final resort after you have looked at traditional means of financing. If you decide to look at using your railroad retirement accounts here is some things to keep in mind:

Railroad Retirement Annuity

The Railroad Retirement Board (RRB) collects over 12% of your income from each paycheck to fund the Railroad Retirement System. It is a significant amount for each paycheck that is garnished. However, the operative word is “retirement”. You aren’t allowed to take any early withdrawals or loans against your Railroad Retirement Annuity. The earliest you can start receiving funds is when you are at retirement age. For railroaders this can be as early as 60 years old.

Railroad 401k Plan

As a general rule, early distributions from employer qualified 401k plans are taxed as ordinary income and are charged a 10% early distribution penalty if they are taken before age 59 ½. There are however, some exceptions. The 10% penalty does not apply to a 401k qualified plan distributions that are:

  • Due to permanent disability. However if this is the case you can claim disability benefits through the RRB.
  • Due to separation from service after age 55.
  • Related to certain medical expenses not reimbursed by insurance. The exception only applies to expenses that exceed 7.5% of the participant’s adjusted gross income.
  • Certain distributions to qualified military reservists called to active duty.

Another option for individuals instead of taking early withdrawals from their 401ks is to take a loan against their vested balance in their plan. The Internal Revenue Service generally limits a participant’s plan loans to a total of $50,000 or half of the participant’s vested balance, whichever is smaller. Generally, repayments must occur within five years, with interest that the participant pays to himself.

Those considering a 401k loan should compare the rates they can get on other types of loans, such as a home equity line of credit. For people with solid credit, that will likely be a better option than borrowing from the 401k.

Finally, if payments are not made on a timely basis, the loan will default and the entire balance outstanding will become a distribution. It will be subject to ordinary income tax and potentially a 10% early withdrawal penalty.

401ks also allow for Hardship Withdrawals. In-service withdrawals are generally available due to employees’ hardship or unforeseeable financial emergency, only under special provisions known as the “hardship withdrawal” rules.  A 401k plan participant who demonstrates “an immediate need and heavy financial need” and a lack of other “reasonably available” resources may qualify for hardship withdrawal.  Here are some examples:

  • Medical expenses for parent, spouse, child, dependent, or any primary beneficiary.
  • Purchase of primary residence
  • Tuition payments for parent, spouse, children, dependent, or any primary beneficiary.
  • Payments to prevent eviction from one’s primary address
  • Funeral expenses
  • Repairs to principal residence that would qualify for a casualty loss income tax deduction.

As a general rule, a plan administrator’s determination of a whether a participant has immediate and heavy financial need is to be made based on all relevant facts and circumstances.

Railroad Pension Plans

Pension plans generally can make distributions only upon death, disability, separation from service, or after the attainment of age 62. (Separation from service includes retirement of the participant). Pension plans are not likely to allow in-service withdrawals due to complex record keeping required.

While difficult to access funds from a 401k, it is possible. However I can’t stress enough that dipping into your railroad retirement should only be done as a last resort for financing. The lesson I hope all of you would get out of this article is that preparation is the best possible plan for these unforeseen expenses when they occur and they will. I would encourage everyone to sit down with their financial planner and put a plan in place to start building that emergency fund if one isn’t already in place. Please take this opportunity to schedule a free 30-minute call with Highball Advisors to discuss putting your financial plan in place.


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Photo by Andrew Roth

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.