How Will Self Employment Affect My Railroad Retirement

Greetings, everyone, and welcome to another informative episode of the Highball Advisors Railroad Retirement whiteboard. I'm John McNamara, representing Highball Advisors, and today we'll delve into the nuances of how self-employment impacts your railroad retirement annuity. We'll explore the implications, such as earnings thresholds and deductions, and provide guidance for those navigating self-employment within the realm of railroad retirement.

First, let's touch on the self-employment taxes you can expect. When you're self-employed, you're responsible for both the employee and employer portions of Social Security and Medicare taxes. This amounts to a 12.4% self-employment tax for Social Security and an additional 2.95% for Medicare, all calculated on your net income. Net income is determined by subtracting business expenses and depreciation from your gross earnings.

However, when it comes to railroad retirement deductions, not all forms of income are treated equally. Some types of income are excluded from your net earnings, including dividends (unless you're primarily engaged in stock trading), interest from loans (unless you're in the banking business), rental income (unless you're primarily in the real estate rental business), and income from limited partnerships.

Now, let's discuss tier one deductions, which work similarly to those for W-2 employees. In 2023, the deduction rate is $1 for every $2 earned over $21,240. This means that for each dollar earned over this threshold, your tier one portion of the railroad retirement annuity is reduced by $1 for every $2 earned. When you reach the year of your full retirement age (as determined by Social Security rules), the deduction rate changes to $1 for every $3 earned over $56,250.

Once you attain full retirement age (based on Social Security rules), there are no tier one work deductions. However, on the tier two portion, the deductions are based on your last previous employer. If you start a self-employed business and later decide to initiate your railroad retirement, the railroad is considered your last previous employer. Tier two deductions come into play at a rate of $1 for every $2 earned, up to 50% of the tier two portion. These deductions continue indefinitely and do not stop at full retirement age.

If you're approaching retirement or are already in retirement, and these deductions apply to your situation, don't hesitate to reach out to me. I can guide you through the intricacies of self-employment work deductions within the context of railroad retirement. Your understanding of these deductions can have a significant impact on your financial planning.

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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.