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  • Writer's pictureJustin Oxford

Retirement Double Dipping - It's Good Until the Tax Man Comes. Tax Efficient Retirement Withdrawal Strategies with BD Oxford Financial.

You worked hard and you saved to enjoy your retirement. Wow good for you! Now your head is spinning trying to find out why nearly 30% of your hard earned nest egg is being taken by Uncle Sam. Double and Triple Dippers beware: taxes are going up, and the value of your dollar is shrinking. The good news is it's not too late to preserve and protect your hard earned retirement savings.


Retiree calculating taxes with BD Oxford Financial and Barry Oxford, focusing on Tax Efficient Retirement Withdrawal Strategies, using financial documents and a calculator

Planning for a Tax Efficient Retirement

involves more than just saving money; it's about strategically managing your funds to minimize tax burdens. At BD Oxford Financial, we help you navigate the complexities of retirement taxes, ensuring you retain more of your hard-earned money. This comprehensive guide explores the tax implications of drawing income from multiple sources in retirement and how converting your accounts to a Roth IRA can significantly reduce your tax burden.


Understanding Retirement Income Sources

Retirement income typically comes from several sources: pensions, 401(k)s, IRAs, and Social Security benefits. Each of these income streams has its own tax implications:

  • Pensions: Generally, pension income is fully taxable at your ordinary income tax rate.

  • 401(k) and IRA Distributions: Withdrawals from traditional 401(k)s and IRAs are also taxed as ordinary income.

  • Social Security Benefits: Depending on your total income, up to 85% of your Social Security benefits can be taxable.


Tax Implications of Multiple Income Sources

Let’s consider an example where a retiree receives income from a pension, a 401(k), and Social Security:

  • Pension Payments - $80,000

  • 401(k) Distributions - $80,000

  • Social Security Benefits - $60,000

To determine how much of the Social Security benefits are taxable, the IRS uses a formula that includes your adjusted gross income (AGI), nontaxable interest, and half of your Social Security benefits. In this scenario, the combined income would be:


Calculator used for planning Tax Efficient Retirement Withdrawal Strategies with BD Oxford Financial and Barry Oxford

Determine Combined Income

$80,000 (Pension)+$80,000 (401k)+$30,000 (Half Social Security)=$170,000

Given this combined income, up to 85% of the Social Security benefits would be taxable.


Taxable Social Security

0.85×$60,000=$51,000


Total Taxable Income Would Be

$80,000 (pension)+$80,000 (401k)+$51,000 (Social Security)=$211,000

This high level of taxable income can place the retiree in a higher tax bracket, significantly increasing their tax liability.


Total Income Would Be

$80,000 (pension)+$80,000 (401k)+$60,000 (Social Security)=$220,000



Benefits of Roth IRA Conversions

Converting a traditional 401(k) or IRA to a Roth IRA can provide substantial tax benefits.

Sailboat on a beach, symbolizing the freedom of a tax-efficient retirement with BD Oxford Financial and Barry Oxford
  • Tax-Free Growth and Withdrawals: Once in a Roth IRA, your investments grow tax-free, and qualified withdrawals are also tax-free.

  • No Required Minimum Distributions (RMDs): Unlike traditional accounts, Roth IRAs do not require RMDs during the account holder's lifetime.

  • Tax-Free Inheritance: Heirs can inherit Roth IRAs tax-free, preserving more wealth.





Example Scenario: Roth IRA Conversion

Let’s revisit our example but assume the $80,000 from the 401(k) is converted to a Roth IRA. After the conversion, the retiree's income would be:

  • Pension Payments: $80,000

  • Tax-Free Roth IRA Distributions: $80,000

  • Social Security Benefits: $60,000

Since Roth IRA distributions are tax-free, the combined income for tax purposes would now be:


Combined Income

$80,000+$30,000=$110,000


Taxable Social Security

0.50×$60,000=$30,000

In this scenario, only up to 50% of the Social Security benefits might be taxable, which significantly lowers the taxable amount and the overall tax burden, and the amount of actual take home income would be the same - or maybe more.


Total Taxable Income Would Be

$80,000 (pension)+$30,000 (Social Security)=$110,000


Total Income Would Still Be

$80,000 (Pension)+$80,000 (Roth)+$60,000 (Social Security)=$220,000


Happy older man sitting in a chair surrounded by money, enjoying the benefits of tax-efficient retirement withdrawal strategies with BD Oxford Financial and Barry Oxford

Who wouldn't want to take the same income with less tax liability!?

We have the tools to execute Roth Conversions with the upfront taxes covered. Protect your hard earned retirement savings.


Comprehensive 30-Year Tax Efficient Retirement Withdrawal Strategies

At BD Oxford Financial, we emphasize the importance of long-term tax planning. A comprehensive 30-year tax plan can help you manage your retirement income strategically, ensuring the safety of your money while reducing your tax burden. By converting your retirement accounts to Roth IRAs, we can help you "divorce the IRS" and secure a more tax-efficient retirement.


Barry Oxford providing expert advice on tax-efficient retirement withdrawal strategies at BD Oxford Financial

By using Tax Efficient Retirement Withdrawal Strategies and converting your retirement accounts to Roth IRAs, you can dramatically reduce your tax burden, especially when you are receiving income from multiple sources. This strategy not only provides tax-free income in retirement but also benefits your heirs. At BD Oxford Financial, we are here to help you build a comprehensive tax plan that ensures the safety of your money and minimizes your tax liabilities. Contact us today to start planning your tax-efficient retirement.




Disclaimer

This is a hypothetical scenario. It is not tax advice or investment advice. This content is intended for educational purposes only. Contact Barry Oxford at BD Oxford Financial for your own personalized scenario.

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