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VIDEO: "Rule of 55" in Railroad Retirement

Retirement Financial Planning Taxes


Transcript:

Welcome everyone to the Highball Advisors Railroad Retirement Whiteboard. My name is John McNamara of Highball Advisors, and today we're going to talk about the rule of 55 in railroad retirement. So it's an IRS term, rule of 55, and it basically means that you can take a distribution from your employer account at the age of 55 or older without receiving that 10% penalty. So let's go over that and what that means and then I'll talk about some strategies that it might be useful to be thinking about, because as we know in the railroad industry, people are starting to take that earlier retirement, there's some buyouts for people, some people are being laid off, some people would just leaving the railroad also. But we know the railroad workforce is shrinking so there might be an opportunity also here from a tax planning purpose, which will save you significant amounts of money later down the road.

So age 55 to 59 and a half, you can be in that window. You have to have been laid off, fired, or have left your job, quit your job. So those are the sort of pre-qualifications, but however, it only affects your current 401K. So the railroad that you have left, it would effect that. So if you had a previous position with another railroad or worked for a non railroad company, you can't take an early rule 55 distribution from those funds. Okay? And if you did, you would have a 10% penalty, and obviously, any distribution before 55 years old will also have a 10% penalty. So that's on top of ordinary income tax that you would pay on the distribution. It would be another 10%.

So what are some good strategies that you can do? But before I get into a good strategy, some people go through economic hardships if you've been laid off or fired so if you ever do have to tap the rule of 55, think of it really as a last resource because that money is growing tax deferred and you are going to need it for retirement. Everybody's circumstance is different. But if you don't need the money and you've been laid off, here's a strategy for you that's going to save you a lot of money down the road. So Roth conversions. You're 55, you had a nice position, you've been, let's just say, let go or are you left on your own on your own terms. You can take that money and do a conversion and convert it into a Roth IRA. Pay the ordinary. You'll have to pay taxes on the 401K, but because your income for the year is going to be low and subsequent years until you find another position, if you even find another position, you might not want to, you're going to pay at that low current tax rate you're at.

So the tax rates are going to be significantly low right now, and in 2025 they're projected to go back up it because the Trump tax cuts will sunset. And, as you know, we're spending like a drunken sailor, $2, $3 trillion, we can all expect tax rates to go up. You're fooling yourself if you don't think tax rates are going up. So this gives you that opportunity. Let's turn a negative into a positive, do some Roth conversions, get that money and then that money is tax free. And when they come, when the tax man comes, to collect money out of 401Ks and all these other retirement funds, your money is all going to be sitting in a Roth tax free. Sorry, I have nothing to contribute because I've already paid in. So take advantage of these low tax rates now. The low tax rates [inaudible 00:03:56] tax free. That's great. Great to do. Because remember, when you do have to take that 401K, you're going to have to pay ordinary income taxes. So let's do it now while the taxes are low.

But anyway, I just want to show that strategy to you. Think about it. Give me a call if you have any issues, you want to talk about it. If it's something that's right for you, I'm more than willing to talk about it. Maybe I can help you out. Please subscribe to my YouTube channel just down in the lower corner there, the lower left, you can just hit the subscribe button. That's great, and I'll keep posting up videos. In the meantime, 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.