As you approach retirement or begin planning for it, understanding your benefits under the Railroad Retirement Act is essential. Especially when it comes to creditable compensation. If you’re like many railroaders, making sure you know how creditable compensation impacts your retirement, disability, and survivor benefits can significantly improve your financial security in retirement and prior to retirement.
Today, I’ll walk you through the basics of creditable compensation, how it’s used, and how you can maximize it.
What is Creditable Compensation?
Simply put, creditable compensation refers to the earnings used by the Railroad Retirement Board (RRB) to calculate your benefits. It’s a component in determining:
- Retirement benefits under Tier I and Tier II,
- Disability benefits, and
- Survivor annuities.
Creditable compensation also plays a role in calculating unemployment and sickness benefits under the Railroad Unemployment Insurance Act (RUIA). The way your compensation is credited will affect how much you receive in both retirement and, if needed, unemployment or sickness benefits.
How Creditable Compensation is Used
Compensation you earn while working for a railroad employer is divided into three key components:
- Tier I compensation (similar to Social Security),
- Tier II compensation (pension-like benefits), and
- RUIA compensation (unemployment and sickness benefits).
Each of these components has annual or monthly earnings maximums that influence how much of your income is used to calculate your benefits.
Tier I and Tier II Benefits: The Backbone of Railroad Retirement
Tier I Benefits
Your Tier I compensation is similar to Social Security. It’s based on your overall earnings and work history, and is subject to an annual earnings maximum.
For high earners, any income above this maximum won’t count toward your Tier I benefits. Each year, the RRB sets this maximum, and it can vary, but for 2024, is around $168,600.
By the way this is the same annual maximum for social security in 2024.
Tier II Benefits
Tier II compensation is unique to the railroad retirement system. It’s like a pension plan specifically for railroad workers. This is where your creditable compensation really counts. The more you earn (up to a maximum), the higher your future pension benefits will be.
The key to maximizing your Tier II benefits is understanding the annual earnings maximum for Tier II compensation. For high earners, income above the Tier II limit doesn’t count toward your pension benefits, but it will still be counted toward Tier I up to that annual maximum.
Tier II annual maximum is $125,100 for 2024.
Compensation Above the Maximum
Once you hit the Tier II earnings maximum, any compensation beyond that is credited toward Tier I, but only up to the Tier I annual maximum. After that, your earnings won’t increase your benefits, though they will still count for your taxable income.
Therefore, if you are earning more than the maximums for Tier I and II you can also consider maxing out your retirement plans outside of RR Retirement. For example, 401K or similar options as well as IRA and backdoor Roth IRAs.
The Importance of RUIA Compensation
In addition to Tier I and Tier II, creditable compensation also plays a role in Railroad Unemployment Insurance Act (RUIA) benefits. These include both unemployment and sickness benefits if you are temporarily out of work or ill.
However, there’s a difference in how this compensation is credited. RUIA compensation is subject to a monthly earnings maximum. In other words, the amount of your compensation that’s credited for RUIA benefits is based on what you earned each month, up to a set maximum.
How Do You Find the Earnings Maximums?
The Railroad Retirement Board provides employers with the annual earnings maximums for Tier I and Tier II, as well as the monthly maximum for RUIA compensation. Each fall, the RRB notifies employers by letter, but you can also find this information directly on the RRB website.
Reporting Creditable Compensation
So, how do you ensure your compensation is being accurately reported? Railroad employers report your creditable compensation to the Railroad Retirement Board using Form BA-3. This form includes details of your earnings, which are reported on either a paid basis or an earned basis.
Paid Basis vs. Earned Basis
- Paid Basis: Compensation is credited in the period it was paid, regardless of when you performed the work that earned the compensation. For example, if you receive a bonus in January for work done the previous year, it’s credited to the year the payment was made, not the year the work was performed.
- Earned Basis: Compensation is credited in the period the work was done, even if it was paid later. This method is less common but can be used in specific cases, such as settlements for time lost.
Maximizing Your Creditable Compensation
Now that you understand how creditable compensation is calculated, let’s talk about strategies to make sure you’re getting the most out of it. For high earners, it’s especially important to plan ahead and use strategies that will maximize your benefits under the Railroad Retirement system.
1. Timing Your Bonuses and Extra Compensation
Let’s take a look at the scenario of someone who plans to work a lot this year and will be over or close to the annual earnings maximum. Also, this person plans to work less in the next year due to changing boards, jobs, or being held from home less.
If you’re close to the Tier II annual earnings maximum, you might want to be strategic about when you reach the maximums. Especially if you are deciding to work/earn less in the next year.
This will ensure that more of your income counts toward creditable compensation for future year(s).
2. Understanding Deferred Compensation
If you have the option to defer income, it’s important to know how this will affect your creditable compensation. Some deferred compensation plans allow you to spread income over several years, which can help you avoid hitting the annual earnings maximum too soon.
However, the RRB treats deferred compensation differently depending on how and when it’s paid, so it’s essential to consult with a financial planner who understands the nuances of railroad retirement. The wrong structure could inadvertently reduce your creditable earnings and lower your benefits.
3. Regularly Review Your RRB Statements
One of the most common mistakes I see is not regularly checking your Railroad Retirement Board statements. These statements detail your reported creditable compensation, and errors can occur.
If your employer doesn’t correctly report your earnings, it could lower your future benefits. Reviewing these statements annually helps ensure your compensation is being credited properly.
Common Mistakes to Avoid
While maximizing your benefits is important, there are also some pitfalls to watch out for:
1. Failing to Report All Creditable Earnings
Ensure all your earnings are being reported correctly, especially if you have multiple income streams or complex compensation packages. Any unreported earnings could lower your benefits.
2. Ignoring the Earnings Maximums
If you’re a high earner, make sure you’re paying attention to the annual and monthly earnings maximums. Ignoring these caps could lead to missed opportunities for optimizing your compensation strategy.
3. Not Seeking Expert Advice
Railroad retirement is a complex system, and it’s easy to make mistakes that could cost you. Working with a financial planner who understands the Railroad Retirement Act can help you avoid these errors and make the most of your compensation.
Conclusion
Understanding creditable compensation is essential for maximizing your retirement benefits under the Railroad Retirement Act. By knowing how your compensation is calculated and reported, you can take steps to ensure you’re getting the most out of your earnings.
Whether it’s timing your bonuses, managing deferred income, or regularly reviewing your RRB statements, small adjustments can have a big impact on your future financial security.
If you’re nearing retirement or simply want to ensure your compensation strategy is on the right track, reach out to a financial advisor who specializes in railroad retirement. Taking control of your creditable compensation now will help you secure the comfortable, well-planned retirement you’ve worked so hard for.
