Understand the essentials of your tier two benefits in railroad retirement.
Welcome, everyone, to another edition of the Highball Advisors Railroad Retirement Whiteboard. My name is John McNamara at Highball Advisors, and this is part two of my previous video of what you need to know about tier one. This is what you need to know about tier two. So maybe curl up on a nice rainy day and watch tier one and tier two videos, if that's something that interests you. But anyway, I'll just give you a high level of tier two.
Once again, this is for those who just want to get a basic understanding of the tier two benefit, and also to help those out in the financial service industry to let them understand a little bit of tier two also. So I'll just walk through this. If you want to see more on this, you want to go a deeper dive, check out my video basics of tier two and railroad retirement. A lot of good stuff there.
So first off, it's funded by the payroll tax. You're paying in 4.9%. Railroad kicks in 13.4% every year up to the annual maximum. This year, filming 2021, I think it's around a 106,200, something like that. And it moves every year. It always moves up. Never goes down. And then once you retire, you get a payout, and the payout's calculated by 0.007, don't know why that number is there, times the average of your 60 highest earning months. So that's five years of your 60 highest earning months times the years of service. So that's the big multiplier there. The more years of service, the higher your tier two payout gets. So that's the payout there.
Now we'll work on to the middle. So how is it taxed? Taxed as ordinary income. It's pension income. So whatever your tax rate is in retirement, expect to pay that rate on your tier two benefit.
Spouse benefit, which is one of the great things, 45% of what the railroader would be getting is the rate that the spouse benefit is set at. So just give you example, if a railroader's tier two monthly benefit is $1,000, the spouse will get $450 on top of that. So that gives you a total of 1,450 in tier two benefits in retirement. So that's the spouse benefit.
Now let's say, if you're working, work deductions. This is a big thing. So let's say it comes to the last pre-retirement employer is the big thing, LPE. So if you left the railroad and you're working for a company, then you turn in your railroad retirement and you still keep working for that company, you're going to get a deduction. So you're going to lose $1 for every $2 of tier two benefits up to 50%. And it also affects the spouse too, so that's another reduction there. So you've really got to understand about working and railroad retirement. Do the math on it. Very, very important.
And now a great benefit that is similar to tier one is the early retirement portion. So if you have 30 years of service, no reduction in your tier two benefit. However, if you have less than 30 years, the earliest you can start collecting your tier two is at 62, in which case you'll have a 30% reduction, and then it obviously scales up if you turn it on later, and then no reduction at your full retirement age. So that's the early retirement.
And then one final thing I threw in there, unlike tier one, there is no delayed retirement credits. Tier one, you can get those delayed retirement credits. If you work past your full retirement age, they give you 8% a year. So 68, you get 8%, 69 you get 8% on top of that. However, there's no delayed retirement credits. So what that means is, hey, do I want keep working and forfeit some of my tier two in order to get the 8% from tier one? But we'll leave that for another day. But I thought I'd throw that in there.
So this is a good framework to understand tier two. You'll be a little bit more knowledgeable about it. So share this with other railroaders. Share it with the people that are helping you out with your finances, so they can get a better understanding of it also. Please subscribe to the YouTube channel. Click on my notification bell. And also, hey, reach out if you want to go through the railroad retirement boarding process. It really helps you understand what the guaranteed retirement income looks like as you plan for your retirement. So until next time, everyone, please stay safe, stay on track and take care. So long, everybody. Bye.
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.