PRAP
 

Hey guys, I spoke with a couple of pilots who mentioned that they try to maximize their 401(k) as early in the year as possible (ideally within the first six months), even though the company’s 17% would fully maximize it by the end of the year. Does anyone understand that strategy? What’s the benefit, or did I misunderstand? All this retirement plan stuff is new to me, so I’m just trying to learn from people with more experience. Thanks in advance!

the IRS has limits on how much money can be put in your 401k. There is a personal limit ($23500 for 2025). That’s the one most people know about but 2 more limits kick in 415c ($70000 in 2025) which is how much your contribution and the companies can total and then we have the 401a limit ($350000 for 2025) which when you hit that limit the company can no longer contribute to your 401k. Since we have 17% direct contribution and as a FO who chases money or a captain you will far exceeded these limits we have additional buckets to spill into. First is your Retirement health account and more recently and Active health account. Any contributions above $70000, or companisation above $350k gets dumped into that account. Now with the new contract we have money market base account (I think I got the term correct) which will eventually be used for contributions above approximately $403000 as another retirement vehicle. As a stop gap we get prap cash which means after $403000 you get a 17% additional compensation on your pay check.

Do if you want to maximize your regiment savings the you want to contribute your portion of 401k saving before you hit other limits. If you make $403000 then you would get 70000 into your 401k plus $22000 into your health care account (which can be used for health care premiums, doctor visits, kids braces, etc) and then after that you would get 17% extra pay above $403000.

if you let the company contribute and you plan on just taking your monthly paycheck divid by 12 months and determine how much to contribute so you hit $23500 by years end. When your contributions hit approximately $12000 you would hit the $70k limit and the would miss out on $10000 dollars of company contributions that would spill into other buckets. Some people hate the health care accounts. Some love them. I have multiple kids so at this time I like the account.

i hope this clears it up. And btw the way I just finished a red eye so I’m sure there are grammar and mouth errors but for the most part this should be correct.

There are a couple of things in your question that need to be picked apart.

First, there are a few IRS limits to be concerned with:

1. Employee Contribution Limit (under 50, over 50 catch up, age 60-63 super catch up for 2025 and beyond)
2. Employee + Employer Contribution limit
3. Eligible income limit

Depending on your income and seniority, the company's 17% alone won't maximize the amount which you are allowed to save in your company retirement account. It certainly helps to contribute at least something. How much might depend on whether you are looking for excess spill to your health care account or not. Many military pilots don't like this as they have TriCare for life and don't need a lot of extra in those accounts. So spreading it out or contributing just enough to maximize with no spill is a good option for those pilots.

Second, some like me prefer to max out my personal contributions by June 16th (12th paycheck of the year) and take advantage of spill once I reach the combined allowed employee and employer limit until I see my target Active HRA/RHA balance at least. After that I will probably adjust to spread it out more in the year or designate excess to the MBCB Plan once it goes live.

Every pilot's situation is unique and given that I tend to take more expensive vacations in the fall, having my 401k and SS contributions over with by June allows me more take home money to spend on other things.

The R&I Committee will usually issue an email on ways to minimize or maximize spill for the following year based on the updated IRS limits that were just published on November 1st.

Wow, well explained finally is making sense. Thanks and have a good rest after your red eye.

so in your case, the advantage of maximizing early is to spill on the HRA that I'm assume is tax free? Or what's the difference or disadvantage if you let the company maximize your 401k, and you save the 23k on your bank account and use it for medical bills if needed?
thanks for your time and wisdom.

Concur on all the above...
Another factor is the time value of your contributed money.
$200 monthly contributed in January-June get more months of growth VS $100 contributed in January-December.

I like the spillage to my Active Health account vs saving to my bank account where I have to pay taxes on it. As someone with kids, one with specaial needs, we use all of the money in the health account. The more I can get into there, the better off I am.

For those of us on Tricare it is much much less of a benefit, but at least some money in the HRA isn't a bad idea for the savings that you'll reap once you start medicare.

Great topic and very timely. I was just having the same discussions with friends and fellow pilots. 82spukram and EWRflyer, appreciate informative responses.

Who's says there's not useful information on APC...

Cheers!

Can you use your HRA to pay Tricare Reserve Select Premiums?

I'm assuming you mean RHA & not AHRA, since you likely wouldn't have an AHRA and Tricare. The RHA can be used to pay premiums after you retire from United, though.

Time value of money is important. The other consideration is designating your contributions as post-tax. There are other strategies (back door conversion) to put money into the post tax bucket but maxing out your contributions increases the percentage of the whole that is post tax and is the easiest way to start building that pile. 23000/70000 per year or so.

There are too many variables in the pre or post tax calculation to definitively recommend one or the other. I prefer it primarily to avoid minimum distributions which will both reduce your principal balance and increase your tax liability in retirement.

The Tricare supplement qualifies as a UA med plan, thus an AHRA.

I don't do it, but pretty sure the answer is yes.

The R&I committee has put out many updates/examples on this. They have an excel document where you can fill in the numbers to see exactly what your spill would be.

how much is the Tricare supplement? I need to call and get some details on it.

128/month me and wife

do you feel like typing up the benefits of it? I had someone mention it once, but I’m just not sure about its value, I guess?

just put the $128/mo into the FSA… unless you have family members with lots of med issues it’s really not necessary IMO.

Couple things, here we go.

1. RHA is triple tax-advantaged, but you must use the money for medical purposes in retirement (the list for legal uses is pretty robust). The RHA is an important medical backstop, whether you’re lucky enough to have Tricare like me or not. Even with Tricare, $100-200k in an RHA might be a prudent idea. However, the RHA is NOT part of your estate, so when you and your eligible beneficiaries pass away, the balance goes back into the trust and NOT paid to your heirs.

2. The company must put their 17% into your 401k until it’s full ($70k). When it’s full there are a few spillage options, one being the RHA, another will soon be the MBCBP. The Cash Balance Plan will be invested similarly to the RHA in mostly conservative accounts and is available to move into your 401k or an IRA when you turn 59 1/2 including while still working for UAL. If you choose to leave it there (I don’t recommend this) and you pass away, the MBCBP is still part of your estate, and WILL pass to your heirs.

3. If you want to maximize your tax advantaged investment opportunities, utilizing the RHA and MBCBP is an integral part of that strategy. You cannot put your money directly into either, it has to come from the 17% the company adds to our paycheck. To do this, quickly front loading the PRAP is crucial.

For what it’s worth, here’s my technique to get money where I want it, yes this takes some planning and full disclosure is much easier as a USAF retiree.

1. Beef up your bank accounts Oct-Dec to cover the bills Jan-Mar.
2. Your Dec paycheck pays out in Jan (into the 401k).
3. Set your 401k to pre- and post-tax contributions as 100% of your pay. Also, make sure to set up the auto-conversion to Roth, which happens immediately when any post-tax money hits your account.
4. When we get the Profit Sharing email in February, set it to go 100% to your 401k.
5. Work your ass off Dec-Feb, depending on your seniority you should be close to $70k and start being paid again in March.
6. Your spillage will go to the RHA until we get the MBCBP option, do the research for what makes sense for you and choose wisely.

can you explain what you mean by setting it to 100% pre and post tax? How can you have 200%? Or am I not reading what you mean correctly?

Sure, on the Schwab PRAP website and app there is a contribution section. The options are for both pre-tax (to $23.5k in 2025) and post-tax ($23.5-70k in 2025), and a dollar amount or percentage of pay for each. Setting them both to 100% makes as much of your paycheck as possible go to the 401k. The pre-tax bucket is filled first, then the post-tax bucket is started and is filled until the total reaches $70k (more if over 50).

Agree with the above. I'll be stopping the supplemental this election period. Mixed feelings with the FSA due to the use it or lose aspect.

I’m surprised that anyone uses the supplemental considering how crappy it is. Maybe the AHRA makes it worthwhile? In general, tricare supplementals for retirees are only good if you are within about 1k of the cap. I have no idea what the reservist plans cost, though.

The FSA is gold. You can fund it to any amount you wish. You can use it to buy bandaids if you want. The list of qualified medical expenses is huge. It’s like saving 35% on every purchase.

Didn't see anyone mention putting money in an IRA account after 401k is maxed out.

Yes, the spill to the Active HRA is tax free and can be used for eligible medical expenses.

The maximum the company can contribute will not max out the 401k. For 2024, the maximum eligible compensation limit is $345,000. 17% of that is $58,650 below the 401k cap for both under 50 and over 50. In order to maximize it, an employee would have to put in something. How much will depend on whether the pilot wants to have spill or not into the Active HRA or RHA.

I'm over 50, so it's actually $30,500 for me this year ($31,000 in 2025). By putting the money in now while I'm in my prime earning years in the highest tax brackets I will be, I save income taxes on $30,000+ per year. I wil pay taxes on that money in retirement when I'm certainly not going to be making the money I make now and I'll be in a lower tax bracket. And this money has the opportunity to grow before retirement. If I decided to have this as take home pay, with federal and my local taxes that will turn into less than $20,000. Putting that into a basic savings or money market account will not come close to off setting the taxes on that, plus I have very few health care expenses at all.

It's not always that simple though. Our youngsters are more often than not better off putting their money in as Roth and taking the tax hit now. 20-30 years of growth tax free more often than not offsets the initial tax hit. Everyone should do your research or spend the $ to get advice on it. When you start getting close to retirement and see how much tax you're going to pay when you do start withdrawing (and the Medicare increase you'll pay) it can be eye opening lol. But these are 1st world problems thankfully.

When you look at required minimum distribution numbers for someone who could realistically have a $10 million+ portfolio after a long career at a legacy, those numbers are pretty staggering and would put you in a high tax bracket. Currently RMDs on $10 million are $377k when they start at age 73 and $625k at age 85- which is going to produce a hefty tax bill. There is a lot of guesswork as to what the future tax code is going to be as well as what inflation does to the tax brackets, but personally I don’t see taxes decreasing in the long run with the way our government spends money.

As someone who was fortunate enough to get hired with the potential of just under 30 earning years, I make Roth contributions to hopefully limit RMDs in retirement to only the company contributions, limiting my future tax liabilities. Obviously you could take this a step further and do a Roth conversion on company contributions to have virtually zero tax liabilities in retirement, however I enjoy spending money on enjoying life now instead of writing a big check to uncle sam every year for the tax bill on the conversion.

Everyone’s situation is different and again it depends on guessing what you think will happen with tax codes in the future, but just wanted to throw another scenario out there.

Also depends very much where you currently reside and where you intend to be in retirement.

That’s why you should do both. Max out the before tax contributions, then do after tax contributions immediately converted to Roth. This will give you Roth and non Roth dollars in retirement allowing you to manage your tax rate. Only downside is more RHA spill which will go away once we figure out the Market Based Cash Balance plan.

YES, DO THIS.

Another simpler answer… time in the market will always beat timing the market.

Maxxing out as early as possible give you more exposure for dividends and dividend reinvestment.

For instance let’s say you max out by April every year… that’s 8 months of exposure, over a 20 year career that’s 13+ YEARS of extra time in the market to capture and reinvest dividends.

out of curiosity, how is your Schwab investment instructions split up?

The advice in here regarding traditional/roth allocations is good for some and bad for others. It’s good to understand the mechanics of manipulating your accounts to put the type of contributions into their respective allocations; however, don’t rely on advice here as to how to allocate the tax-treatment of your money.
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Anyone familiar with our "PRAP Cash" that pays out after hitting 10k into the health account? It triggered for me with a small amount last paycheck that I didn't try to calculate and now the Mid NOV pay stub shows what looks like about 7% of gross paying out as PRAP Cash. I would have assumed I'd see 17%. Am I missing something? TIA

It's 17% after about $403,800 so your entire pay period probably wasn't over that amount. Next paycheck should be a full 17%. Add up your regular pay and profit sharing and anything over the $403.8k and see if that excess X 17% is what your paycheck shows. Also it's in arrears. So it would be on the 1st when you went over and paid out on the 16th check.

Hope that helps.

And your PRAP cash 17% will be reduced by taxes. Lots and lots of taxes.

and it’s a pay check behind.. so PRAP cash on the 16th is for the 17% of eligible earning on your 1st of the month check.

it’s a valid strategy but given our income levels it most likely has to be Done on a post-tax (ie paying taxes on it this year) basis to a traditional IRA and then if you choose to do so , back door covert it to Roth,

the problem with this strategy is that if you already have a traditional IRA with pre-tax (ie tax deferred) funds in it, the conversion has to be done on what’s called a “pro-Rafa” basis meaning some of the converted funds will be from the pre-tax and some from the post-tax. Keep in mind, any and all traditional IRA sources are considered in this rule so just opening A new trad Ira to try and avoid this doesnt work. 401k conversions do not use the pro-rata rule.

example;

94,000 pre-tax in a tradition IRA and you put in 6000 post tax with the intent to immediately convert it to Roth giving you a total of 100,000 in the account.

if you try to convert the 6000 you just put in, only 6% of the 6000 will get converted from the post tax fund or about 360. The remaining 5640 has to come from the pre-tax money that was already in the account which would then generate a tax bill on that amount and also leave 5640 of post tax money in your IRA.

Transferring your traditional ira a 401k solves this problem.