How to Maximize Savings Using Chevron Retirement Benefits in Tax-Beneficial Ways

Is this you? You’re still planning to work for another 10 or 15 years, so retirement seems like a distant dream. But you’re approaching that point in your life when you wonder, am I saving enough for retirement?  Where and how should I be saving? How can I save in a tax-efficient manner?

AT A GLANCE:

  • How to max out your Chevron Employee Savings Investment Plan (ESIP) every year?
  • What’s an after-tax rollover and how can it save you taxes in the long-run? 
  • How to take advantage of your Net Unrealized Appreciation (NUA) from Chevron stock
  • What are the IRS 415 Income Limitations for contributing to a 401(K)?
  • How using backdoor Roth Contributions can be a tax-beneficial way to increase your savings
  • How is your Chevron Pension (CRP) calculated and how can you affect your pension amount?

Chevron provides amazing benefits that all employees should be using to their full advantage. Chevron provides retirement savings plans like the Chevron Employee Savings Investment Plan (ESIP). They also provide qualified retirement income benefits through the Chevron Retirement Plan (CRP).  Many corporations have moved away from providing their employees with pensions, so this is a benefit many individuals in the US no longer have.  

As a Chevron employee, you want to ensure you are maximizing these plans in coordination with your overall savings and retirement plan. 

 

How Do I Max Out My Chevron Employee Savings Investment Plan (ESIP)? 

The Employee Savings Investment Plan (ESIP) is the name for Chevron’s 401(k) plan. Chevron will contribute to your ESIP by matching your contributions up to 8% of your salary annually.  If you don’t contribute to your ESIP, Chevron will not contribute on your behalf. 

For your 401(k) contributions, you have the option of contributing to the pre-tax, Roth or after-tax sources. In order to receive the Chevron match, you must contribute at least 2% to the basic source in the ESIP. 

If you are under 50, in 2019 you can contribute up to $19,000 between pre-tax or Roth.This limit of $19,000 covers both pre-tax and Roth contributions, so if for example you contribute $11,000 to pre-tax, you could then only contribute $8,000 to Roth.  If you are over 50, you are allowed to contribute an additional catch-up amount of $6,000 for a total of $25,000 from pre-tax and Roth contributions. 

When you contribute pre-tax, your contributions are taken from your paycheck before taxes and put into your 401(k) account, grow tax-deferred and when withdrawn, you pay ordinary income taxes on the income.  So, typically, if you think you are in a higher income tax bracket today than you will be in retirement, pre-tax is the choice for you. 

When you contribute Roth, your contributions to your 401(k) are made after taxes and grow tax-free.  Withdrawals from the Roth source are tax-free. If you are making less income today than you will be in retirement, than we typically recommend that you contribute to Roth.   

The 3rd source is after-tax.  After-tax contributions are put into your 401(k) after taxes.  These contributions grow tax-deferred within this account and once withdrawn, no taxes are due on the contributions but any earnings will be taxed at ordinary income rates.  At Chevron, the max you can contribute to after-tax depends on how much you and Chevron contribute to your ESIP. Here’s some examples below:

If you have cash compensation of $200,000 and you are over 50, you can max out your pre-tax at $25,000 and Chevron puts in $16,000 of employer contributions (8% of $200,000).  Since you are over 50, the most you can put into the 401(k) between all sources is $62,000. You want to know how much you can contribute to after-tax so you subtract $25,000 and $16,000 from $62,000, leaving you with $21,000 you can contribute to the after-tax source.  

If your salary increases to $280,000 a year, Chevron will now put in $22,400, leaving you with only $14,600 you can contribute to the after-tax source.  

 

What’s an after-tax rollover and how can it save you taxes in the long-run? 

A great savings strategy to couple with the after-tax 401(k) savings is the after-tax rollover. This allows you to roll out the after-tax source from your 401(k) to a Roth IRA on an annual basis.  Once the funds are in your Roth IRA, both contributions and earnings will grow tax-free! This is a great way to get additional savings into a Roth IRA, especially when you are over the income limits to contribute to a Roth IRA directly.  There are some limitations on the Chevron plan in regard to after-tax rollovers.

Often this type of withdrawal will suspend contributions to the plan for 90 days so you should wait until September or October to roll out the after-tax source, after you have maxed out your employee AND employer contributions, but before contributions restart for the following year in January.  

 

How to take advantage of Net Unrealized Appreciation (NUA) from Chevron stock?

If you were an employee at Chevron before 2013, it’s very likely that you have a large amount of Chevron stock in your 401(k) as Chevron would make their employer contributions to Chevron stock only.  You may have an opportunity to take an NUA withdrawal in the future after a triggering event.  NUA allows you to distribute your employer stock to a brokerage account and pay ordinary income taxes on the cost basis only.  Any gains on the stock will only be taxed when sold and will be taxed at your long-term capital gains rate. This can be huge tax savings if you have a very low-cost basis and a large gain on your stock.  

 

 

What are the IRS 415 Income Limitations for contributing to a 401(K)?

The IRS places income limits on the ESIP that prevents employees and Chevron from contributing to the ESIP upon reaching this limit. The 415 income limit is $280,000 for a calendar year.  This means that if you are a highly compensated Chevron employee with a salary and bonus that exceeds $280,000, yours AND Chevron's contributions to the ESIP will cease once you reach this income threshold.  Since Chevron contributes up to 8%, the most Chevron can contribute in 2019 is $22,400 (which is 8% of $280,000). If you are a high-income earner, you want to recognize your contributions may be cut off earlier in the year, especially once you receive your bonus.  You should set your 401(k) contributions higher at the beginning of the year to max out before you reach the income limit every year. 

Saving in the 401(k) earlier allows for more growth over time which allows your assets to grow faster, potentially allowing for earlier retirement.  We encourage our Chevron savers to contribute as much as they can to the 401(k), even when retirement is several years away, in order to take advantage of many years of compounding growth. 

 

How can using backdoor Roth Contributions be a tax-beneficial way to increase your savings?

In addition to the after-tax rollover savings strategy, Chevron savers can put away $6,000 (if under age 50) or $7,000 (if over age 50) into a Roth IRA every year, even if you are over the income limit to contribute directly. A backdoor Roth contribution is a strategy in which a non-deductible IRA contribution is made to a traditional IRA and is subsequently converted to a Roth IRA.  In the case of a married couple, both spouses can make backdoor Roth contributions. If you are also rolling out your after-tax, this means you can get a huge amount of tax-optimized savings into Roth IRAs a year.  

You must have earned income to make an IRA contribution. This means you can continue to make these contributions into retirement if you are receiving performance shares.  

There are some additional nuances to this strategy. Something to keep in mind is that you must not have any pre-tax money in traditional IRAs to execute this strategy and you must file a Form 8606 annually with your tax return. Taking advantage of backdoor Roth contributions over several years will allow you to have a large portion of tax-free money that you can access in retirement. 

 

How is your Chevron Qualified Pension (CRP) calculated and how can you affect your pension amount?

At Chevron, you also have a qualified pension plan in which the pension formula has two variables that you have some control over.  The formula is as follows:

CHEVRON CRP: 1.6% x Years of Service X Average Final Compensation (AFC)

As you can see, years of service and AFC are included in both pension calculations.  You, as the employee, have some control over your years of service. In some situations, working a few additional years can make a big difference in the benefit you receive in retirement.  Your last few years of working are often your most highly compensated.  

Chevron looks back at the last 10 years and picks the 36 consecutive months of your highest compensation to determine your AFC. Receiving additional months of higher income can also increase your benefit.  Once you approach retirement, you have the option to take the pension as a lump sum or an annuity benefit. It’s important to educate yourself on the pension formula for your benefit and understand how you can potentially increase that benefit.  

Because Chevron provides their employees with a pension plan, retirement projections should take these inflows into account when projecting the assets needed for retirement Individuals with a pension plan may not need as large of an asset base as those who are not eligible for a pension.  For this reason, it’s important to understand all your retirement income and assets by reviewing and developing a solid retirement plan. 

As a Chevron employee, you have a full array of financial tools and benefits available to you. It’s up to you to start using them immediately, maximizing their benefits and lowering taxes, and making the most of your prime retirement savings years. 

However, it can become overwhelming to try to anticipate and balance multiple competing priorities. If you need guidance, our experts have worked with many Chevron professionals and executives to analyze their options and build a plan that puts them on the path to a comfortable retirement. 

Learn more about how we can develop plans customized for high-earning Chevron employees and about how our process supports you wherever you are in your investing and retirement planning journey. 



 

 

Willis Johnson & Associates is a registered investment advisor. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Corporate benefits may change at any point in time. Be sure to consult with human resources and review Summary Plan Description(s) before implementing any strategy discussed herein.