Learn the proper way to withhold taxes from your railroad retirement annuity.
Welcome everyone to another edition of The Railroad Retirement Whiteboard. My name's John McNamara of Highball Advisors and we're going to talk once again, another fun subject of mine, taxes. Big on taxes here. So big part of a railroader's retirement is the annuity. However, once again, Uncle Sam needs his amount of mon... Wants his money. So we have to figure out how much should we withhold from that railroad retirement annuity?
So let's walk through it and we'll give you some ideas on it. So railroad retirement is tier one and tier two, I talk about that all the time. Now, your tier one portion, part of it is a Social Security equivalent benefit, SSEB. You'll probably see that acronym around, but however, that's only from the age of 62 on is that a Social Security equivalent benefit.
All right. Now, pre 62 is a non Social Security equivalent benefit. That's that portion before 62 portion of tier one, and then your tier two portion is always going to be a non Social Security equivalent benefit. So tier two and NSSEB, tier one portion of that. Now that makes up your railroad retirement and how it's classified by the IRS, which is important. Then every January from the RRB you'll get tax statements. So the form will be the RRB-1099, which is for the Social Security equivalent benefit portion of your annuity. Then form RRB-1099R is for the non Social Security equivalent benefit and the tier two. Okay, there we go. I got to catch my breath.
So you have a lot of income coming in. Now we have to learn how to withhold some money so we can give it back to the IRS. They don't want it at the end of the year. They want it right away. So the tier one portion, what I'm talking here is the Social Security equivalent benefit portion. The stuff that looks like Social Security is they'll take... If you don't send in this form, form W-4V they won't take any money out. Here's the form right here. You can Google it and print it out here. So it's a vol... Big word, voluntary withholding request.
Then you go to line six of this form, amount to be withheld and they have certain percentages here that you could take out. 7, 10, 12, 20. What is that? 22% can be withheld. So this is where you got to do proper tax planning. Say okay, how much income do I have? What bracket am I in? What marginal bracket am I going to be in? Then you want to put that down your form. Once that form is completed, you send it to the RRB. Don't send it to Social Security, send it to the RRB. Very important. So that's the Social Security equivalent benefit piece.
Next up is the tier two and the non Social Security equivalent benefit. So file the form, let's see here. RRB W-4P, which is this form here. Once again, it says don't have to file it. You don't have to file it. However, if this portion here is going to exceed $2047 a month, which it probably most likely is, they're going to withhold it as if you're married with three kids. So you probably want to complete this form, figure out all your allowances. Do that and then send that to the RRB.
So you got two forms you want to fill out your RRB. Proper tax planning, talk about this all the time. Now I have some warning here. Things to look out for. This is where it gets tough. So at 62, you have an issue. So if you're at 60, let's say you start 60, 61, you're on railroad retirement. That is all NSSEB. So that's all taxed at ordinary income. However, at 62, a portion of that splits off into SSEB, Social Security equivalent benefit. They are going to want that taxed. So you can't go oh my God, I got all this tier one, which will be a lot of money and not have anything withheld. Well, you can always do that, but you're going to have a big tax payment come tax day and if it's a significant amount of money, you're going to have a tax penalty.
So that's the thing. You got to be very careful. You got to file this form W-4V on your 62nd birthday year there. Start that withholding. Then also it's really the tax payment and penalty. So that's a big part. So this part here gets taxed really as ordinary income and then this gets taxed at Social Security. But I just wanted to walk you through the withholding process here. So when you file every year when you get your railroad retirement, I don't want you to get surprised by that big tax bill, definitely around 62. So.
I hope you found this helpful. This is the kind of stuff that I'll do for my clients, the tax withholding, make sure that they're not overpaying taxes or underpaying, I should really say is the big thing. Keep an eye on that. So like I said, I hope you found this helpful. Reach out to me if you want. If you're at or near retirement or in retirement, want to go through the boarding for railroad retirement process. Really helpful tax planning, big part of my practice. Subscribe to my YouTube channel, click on the notification bell to get the latest video. Until next time everyone, please stay safe, stay on track, and take care. So long everybody.
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.