Four Retirement Planning Tools Available to Chevron Employees

As a Chevron employee, have you ever wondered if you are taking advantage of all the tools available to you in order to best set yourself up for retirement?

Many Chevron employees wrestle with if they have saved enough or if they are doing all they can to prepare for the next stage of their life. By utilizing the tools listed below a Chevron, employees can rest easy knowing they have fully taken advantage of all the retirement benefits and leveraged all of the financial and tax planning strategies available to them.

• Make the Most of Chevron’s Long-Term Incentive Plans (LTIPs) Offered:

For many key and highly compensated employees, Chevron has several additional LTIPs in place that can help employees save for retirement. Some of these LTIPs are given as Restricted Stock Units (RSUs), Stock Options, and Performance Share Units (PSUs). Each of these incentive plans gives Chevron employees the ability to earn or buy discounted company stock for achieving certain required performance goals or years of service.

Each incentive plan has different means of being taxed and, if not planned for correctly, can leave an employee holding a larger than desired tax bill. In order to get the most out of these incentive plans, Chevron employees should consult a financial planner to strategies the best time to exercise stock options as well as how to plan for the vesting of RSUs and PSUs.

• Pension Plan Lump Sums:

Chevron has a generous pension plan in place for their employees. This plan is funded entirely by Chevron and requires no contributions from the employee. Chevron calculates the pension benefits based on a formula that considers years of service as well as salary amounts. The pension amounts are then calculated based on a number of variables, one of them being segment rates. These rates can greatly affect the pension amount and it is encouraged to talk to a financial planner to go over its impact on your specific scenario and retirement date. One of the most beneficial options is to take the total lump-sum payment.

The benefit of taking the lump sum option is that you avoid some of the additional costs of actuarial and management of the funds under the company. Pension fund balances are professionally managed by employer-sponsored firms that have to make conservative investments meaning that employees could miss out on the potential growth of their funds. The lump sum option allows a greater range of investment options with the funds in order to take advantage of riskier higher yielding investments. There are also estate planning benefits of the lump sum option. Under the annuity options, the plan terminates sometime in the future, whether it be upon your death or a stated beneficiary’s death. Under the lump sum payment, Chevron employees have all of the cash in their control. If invested correctly, multiple generations could reap the reward of these funds, and they can be used by the retired Chevron employee immediately if needed.

• Mega Backdoor Roth Conversions:

A Mega-Backdoor Roth Conversion is a tax planning strategy that takes advantage of the tax-free nature of Roth IRA accounts. This strategy can be taken advantage of while you are still employed at Chevron. How it works is a Chevron employee will max out either their Pre-Tax or Roth contributions to their 401K plan (2022 Limit is $20,500, $27,000 if over 50). Chevron will make a matching contribution of 8% of your salary for income earned up to $305,000.

This means that Chevron will put $24,400 in your 401K on your behalf. Then the Chevron employee will contribute After-Tax funds up to the IRS limit ($16,100 in 2022). After making the After-Tax contribution, the Chevron employee converts the funds to a Roth IRA account. This should be done as soon as the after-tax contribution is made, as any gains on the funds are taxable when rolled to the Roth IRA. After the funds are in the Roth IRA, they are able to grow and be withdrawn tax-free. These transactions can be difficult to complete, and it is recommended that you consult a financial planner to talk over various other items that would need to be considered before proceeding.

• Net Unrealized Appreciation:

Net Unrealized Appreciation or NUA is a beneficial tax strategy that allows a Chevron employee to have their company shares be taxed at the preferential capital gains tax rates instead of their ordinary income tax rates. NUA is a beneficial strategy for Chevron employees who hold low-cost and highly appreciated Chevron shares within their company’s savings plan. In order for this strategy to work, an employee must be eligible for a distribution from their qualified plan, generally, at retirement or age 59.5. The employee takes a “lump-sum” distribution from the plan, distributing all assets from the plan during a 1-year period.

The portion of the plan that is made up of mutual funds and other investments can be rolled into an IRA for further tax deferral. The highly appreciated company stock is then transferred to a non-retirement account. The tax benefit comes when you transfer the company stock from a tax-deferred account to a taxable account. At this time, you apply the NUA Rule, and you incur an ordinary income tax liability on only the cost basis of your stock. The appreciated value of the stock above its basis is not taxed at the higher ordinary income rate but at, the lower long-term capital gains rate, currently 15%. This could mean a potential savings of 20% in taxes.

Here at Rhame & Gorrell, our CPAs and CFP® professionals are happy to conduct an in-depth review and analysis based on your current and future financial situation. If you have more questions about the topics discussed above or any other financial planning needs, please do not hesitate to reach out to us at (832) 789-1100.

Questions? Schedule a complimentary discussion with one of our experienced advisors here. 

Rhame & Gorrell Wealth Management, LLC ("Rhame & Gorrell" or "the Firm") is an SEC-registered investment adviser with its principal place of business in the State of Texas. Registration does not imply a certain level of skill or training.

This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own CPA or tax professional before engaging in any transaction.  The effectiveness of any of the strategies described will depend on your individual situation and should not be construed as personalized investment advice.

For additional information about Rhame & Gorrell, including fees and services, send for our Firm Disclosure Brochures as set forth on Form ADV Part 2A and Part 3 by contacting the Firm directly. You can also access our Firm Brochures at www.adviserinfo.sec.gov. 

Rhame & Gorrell Wealth Management is not affiliated with or endorsed by Chevron Corporation.