Leaving Shell – Taxes

Full Transcript:

I’m leaving Shell, but I’m going to get killed in taxes. Is there anything I can do?

Leaving Shell can come with a lot of lump sum payments, but it can also come with a huge tax bill! Let’s look at a hypothetical example, John, to go over a few strategies that he’s looking at to help reduce his lifetime effective tax rate.

Now, John’s leaving Shell this year, and John’s married. John’s already received his base and bonus and PSP. In addition to that John’s receiving a severance payment. He’s getting a lump sum out of his Shell Provident Fund, BRP, and is also giving a lump sum out of his Shell pension BRP. And then lastly, as he’s leaving with severance, he’s also getting a bonus prorated for 2024. So, with all of those payments, John is in the top tax bracket this year. Now we’re going to assume that John’s income goes down in future years. So maybe he’s retiring, starting the business or just going to a less demanding job. Once John’s in these lower income, we see that generally with Shell retirees, when they get to retirement, their income and tax bracket goes back up. This is because their pension, Social Security, and required minimum distributions all kick in and are generally taxable. So, what can John do to help reduce his effective lifetime tax rate?

First, let’s look at things he can do to minimize his 2024 taxable income. Next let’s talk about how he can push some income from 2024 into 2025. And lastly, let’s talk about what John can do to really optimize using these lower tax brackets before future income goes back up.

So, in 2024 for his taxable income, there’s a few things John can do to reduce this. One, John should consider maxing out the pre-tax bucket within this 40(k). Now, if John’s 50 or older this year he can also contribute an additional $7,500 for a catch-up contribution for a total of $30,500. Now, with John being married, if his spouse also has access to a 401(k), they can also contribute to the pre-tax bucket as well. In addition to that, they should look at contributing to a health savings account or HSA. With the health savings account, they’ll get a tax deduction for their contributions. That money will then grow tax-deferred and can be used for future health expenses tax-free.

In addition to some savings accounts, other places they can do to reduce taxes look at tax loss harvesting within their taxable investment accounts. This is a tactic of selling positions that are at a loss to offset other realized capital gains and offset to $3,000 of income.

And lastly, they should look at their gifting strategy. If John and his family are, charitably inclined, they can increase their deductions on their tax return by accelerating gifting. A great way of accelerating gifting is using a donor advised fund, allowing you to get the deduction today for gifts that the charity will receive in the future. My favorite way of funding this is with appreciated stock.

Now, in addition to reducing their taxable income for this year by pushing some income out into the next year, they can also pay less in taxes. Now, in order for John to do this, he needs to have some control of his last day on payroll. So, if John can reach immediate pension eligibility, his severance payment will be split into two equal payments, with the second one being in February of next year. In addition to that, John’s receiving two BRP lump sum payments. These payments come out 90 days after his last day on payroll. So, if John leaves Shell well into Q4, he’ll then receive these payments in Q1 of 2025, also pushing taxable income out to 2025.

Now, the third thing is these few years that he has of a lower income and therefore lower effective and marginal tax rates, John should consider Roth conversions during this period, taking money from his pre-tax bucket within his 401(k) and any pre-tax IRAs they have, and then converting it to Roth, so it’ll grow tax-free and then can be pulled out tax-free in retirement at these higher income years.

Now, I just went over a whole bunch of stuff and didn’t go very deep. So please stay tuned for future content where I’ll start doing deep dives into individual strategies here to help you understand them more. Please also continue to like this video on social media and share them with your colleagues.