VIDEO: Tax Efficient Distribution in Railroad RetirementVideo Financial Planning Taxes
Welcome everyone to the Railroad Retirement Board. My name is John McNamara with Highball Advisors. And in this episode, we're going to talk about tax efficient distribution of your retirement accounts, exciting stuff, get a pot of coffee on, And we'll get to it. So I just want you to the purpose of this is just conceptually talk about some ideas. You know, this isn't really tax advice, but I want you just to think about these things, because it's, it's a great opportunity. And It's really unique to railroaders. That's What I like to stress about. This is, once again, the power I talked about all the time, power that railroad retirement annuity, It gives you certain advantages I talked about in my previous video about your risk profiles, because railroad retirement annuity. Now I'm going to talk about the tax advantages or the opportunities, I should say that it gives railroaders. So typical assets railroad retirement assets that you'll have, you have a 401k tax deferred 401k. Some people also have other taxable accounts at the time of retirement, you know, like a Charles Schwab account or a TD Ameritrade account, something like that, you know, maybe have some stocks or bonds in there or something. And then also you have your railroad retirement annuity that you've been paying into your whole career. And that gives you that floor of railroad retirement income, which is fantastic. And then other individuals I didn't listed here will have a pension, some defined pensions, so the more that floor, Great for retirement. So that gives even more opportunities to do stuff with your tax deferred account. And then when you have those assets, and it comes to retirement, you know, I've got to fund my retirement, Obviously, the railroad retirement annuity is will support a lot of your retirement hopefully depending upon how you are looking to spend in retirement per month, but the average comfortable couple is five. annuity pays out over $5,000 a month. So that's a good floor for individuals unless you're like in Manhattan or something. And then you have your distribution strategies, you can pro rata strategy just means that you're spending all your accounts down equally to fund your retirement lifestyle. And then you also have a sequential strategy. Which means that you are spending down your taxable accounts first, right, you might pay your taxes first, And you let your tax deferred accounts grow. Right. So that's, that's the sequential strategy. So once again, I talked about the 60 and 30 of the railroad retirement, so I did an example here,
because I don't want to get too deep in the weeds. But I kind of like to teach through examples. Also. I mean, I know myself, I learned a lot through examples. So I take like a 49 year old couple, right? This case, lets say he's working in the railroad, he's 49, the wife, She's working also, they happen to be same age 49 years old, and they're looking to retire at 60 is 30 years, it'll be done 60 and 30. He wants to other things. So he's going to retire, they have combined
income, They do well, $175,000 a year. Great for them, and they have a taxable account with 50,000 money from a will or an inheritance. And they have a 401k combo of $450,000. In a tax deferred 401k and, you know it's growing, It's being matched by the companies that they work for. So, you know, by the time at 60, they can expect that to significantly grow. That's another 11 years that they'll be looking to grow that money. So they'll be looking forward to their retirement. So Let's just kind of look at a chart here that I put together, it's not pretty, but
bear with me. So we have their incomes here, right income, hundred thousand 200,000 300,000. on the y axis x axis is their age from 50. out to 90, most financial planners do planning up to 90 data tax rates are current tax rates 10% 12% 22%. These are the current tax rates.
You know, people don't know about the current tax rates, I think they're only good till 2024 or 2026, then they sunset. So I don't think they're going down again. So we'll just kind of work with these numbers. But this just gives you another reason to kind of think about the strategy that I'm about to outlay. Because I think they're probably going to be going up. But I'm not a politician, thankfully. So Here's the couple's income, right there just right at the 22%. Tax line. It's all they say plenty, right? They don't pay 20%. And you know they're grown here will keep raising their salary as they approach retirement, And then boom, drop straight down. Right, They both retired. And that's the floor now, which is the Railroad Retirement annuity. Okay, so they've even dropped them below Even the 12% line. Now What they have is an opportunity, Okay, they've just retired, I really have a great opportunity. Because if they don't do anything from at 70, Look how their income shoots back up. And Why is that is because the required minimum distributions come in, they have to start paying taxes on their for their tax deferred 401ks, So we'll shoot the income back up, They got to start paying taxes, We don't even know if this tax rates could stay the same. So we want to get, We want to start to say, Hey, you know, I don't want to be paying all these taxes in retirement, Why I have a great floor of income I still like to always minimize taxes, right? So I'm all about maximizing your railroad retirement. So this is what we want to talk about. So I have this opportunity from 60 to 70. I'm going to start to look to fill if you can see, this is like a bucket. And I want to start filling it up. What do I mean by that? I want us every year I want to start looking at doing an annual Roth conversion. So I want to take
money out here, I'll pay the income tax on it, I will take that money, and then I will move it into a Roth IRA. And What does that mean? That means that all that money, now that comes out of the Roth IRA, as it grows, everything is tax free. So this right here, During
these 10 years, I'm going to fill up this bucket up to the 12%. Knock this down, right. So now I don't have to pay the taxes as much in retirement because it's not as much it's been converted. I've been paying taxes all along here. But The advantage of that scenario is that as this is the roth 401k grows, It's called tax free, right? So you have a great floor of your railroad retirement, which is constantly flowing. And you now converting everything into a retirement strategy. So by doing that, This can save you hundreds of thousands of dollars, I ran this scenario just for this fictitious couple on my tax software. All right, and this would save the couple by the age of 90,
obviously, and you know, God willing, hopefully ever it makes it to 90. But by doing those Roth conversions that I've talked about every year, Right, sequentially doing that, doing that doing it, and still doing it, you know, versus a pro rata distribution, which is the red line, which is nothing. Its well over a half million dollars in savings. Okay, so there's hundreds of thousands of dollars available to individuals by taking certain strategies to minimize taxes. that's, to me, that's the biggest risk in retirement, right is taxes, we don't know where taxes are going to be going. And The sooner way sooner we can minimize our taxes, We have a better chance to keep growing our money. So, conceptually, this is what I want to talk to you about give you some ideas to start thinking about it. You know, look at Roth conversions. I think they're very important. If you need some help. I'd love for you to reach out to me, I do some free consultations. We can talk about this strategy a little bit more, If you want to pursue it. Also, really would appreciate if you could
subscribe to my YouTube channel. I’d like to get a few more subscribers in there. much appreciated. In the meantime, stay safe stay on track. Until next time, take care. So long, everyone
Get Your Free Railroad Retirement Assessment
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.