The Power Of Zero Show

This episode focuses on a question David recently got from a couple – they made $650,000 per year and wanted to know whether they should consider doing a Roth conversion. Some details about the California-based couple who asked David their question: they're both age 50, with $1.5M in their old IRAs and 401k. They had a lifestyle need of approximately $100,000 after tax, and had about $1M in liquid savings in their taxable bucket. And, lastly, they were contributing $100,000 per year to that bucket and were growing it in plain taxable mutual funds. The couple, which represents the case-study for this episode, are in the highest marginal tax bracket (at 37%). In addition to that, they would have to pay another 11.3% in California State tax. This means that, were they to do a Roth conversion, they would be paying tax on top of all their other income, and they would be paying tax at 48.3%. In other words, they would be giving away nearly half of whatever portion of their IRAs or 401k they converted back to the IRS. Having all of the information above, the question becomes: does it make sense for a couple of 50 year olds to undertake a Roth conversion? For David, if they believed that the rates at which they'd be forced to pay in the future are going to be higher than today's rates, then the answer is yes. Then, they should pay the tax today before the IRS absolutely requires it somewhere down the road, at higher rates… However, if they don't believe that taxes down the road are going to be higher than they are today, then they shouldn't do a Roth conversion. David discusses the fact that, sometimes, we get so caught up in the idea of getting to the 0% tax bracket at all costs that we fail to do the math along the way to see whether the cost of doing so actually makes sense. For David, Roth conversions tend to make sense for people who will be in a similar income range in retirement – particularly if they're currently in the 22 or 24% tax brackets. David warns against allowing ourselves to become so consumed by the fear of higher tax rates that we make irrational decisions about the timing of our payments. We have to be patient, thoughtful and methodical. David shares the fact that the situation this podcast episode revolves around is a classic case where it may make sense to utilize the tax-free qualities of the LIRP (Life Insurance Retirement Plan). With the LIRP, we're getting as little death benefit as the IRS requires, and we're stuffing as much money into it as the IRS allows, in an attempt to mimic all of the tax-free benefits of the Roth IRA without any of the limitations of a Roth IRA. Mentioned in this episode: David's books: Power of Zero, Look Before Your LIRP, The Volatility Shield, Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube

In May 2021, David recorded a podcast that focused on the Secure Act 2.0, the follow-up to the Secure Act that completely killed the stretch IRA and the stretch Roth IRA. Today's episode looks at the big surprise that has surfaced in the latest updated iteration of the Secure Act 2.0 that's currently gaining steam in Congress. In last year's podcast episode, David outlined six major changes to retirement planning that this law is proposing. According to David, the one thing that the previous version of the Secure Act 2.0 did not address was what happens if a beneficiary inherits a retirement account where the original account holder had already begun to receive required minimum distribution. This is something that wasn't sitting well with the financial planning community. David explains how things are different with the latest piece of legislation, as it spells it all out perfectly the two crucial criteria that are connected to how and whether the 10-year rule of the Secure Act 2.0 applies or not. The first crucial criteria is whether or not the original IRA account holder died before their required beginning day. The second is whether they had begun receiving minimum distributions, and secondly, whether the beneficiary is eligible. There are different people who could potentially qualify as an eligible designated beneficiary (or EDB): a surviving spouse, a minor child, a disabled person, a chronically-ill person, and a person not more than 10 years younger than the account holder. David discusses the fact that, if you're an eligible designated beneficiary of an IRA, the 10-year distribution rule doesn't apply to you. You get to continue to receive RMDs from the account based on your life expectancy. There are a couple of possibilities if you happen not to be an EDB and you inherit an IRA. In the case of a beneficiary who inherited an IRA from someone who had not yet reached the required beginning date for that person, the 10-year rule applies. You'll have to withdraw 100% of that IRA within 10 years from the death of the account holder. If you're not an EDB and the person from whom you inherited the IRA had already begun to take their RMDs, then you would have to take RMDs based on your life expectancy and completely withdraw all the money within that 10-year period. Then, there's the scenario in which you aren't an EDB and you inherit a Roth IRA - Roth IRA owners aren't subject to RMDs and, therefore, they're always considered to have died before their required beginning date. This means that, if you inherit a Roth IRA, you'll never have to take required minimum distributions, regardless of whether you're an EDB or not. When it comes to POZ planning, all of this serves as motivation for you to get your money shifted to the tax-free bucket, shifted to the Roth IRA – pay taxes that are at these historically low tax rates so that your beneficiaries won't have to pay the taxes at the apex of their earning years at a period of time when taxes are likely to be much higher than they are today. Additionally, by having your money in Roth, you spare your beneficiaries from having to worry about taking RMDs should you actually die after your required beginning date. Mentioned in this episode: POZ episode - The Secure Retirement Act 2.0 – 6 Things You Need to Know David's books: Power of Zero, Look Before Your LIRP, The Volatility Shield, Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube

In this episode, David focuses on the true fiscal day of reckoning for the U.S., and how it should inform important retirement decisions when it comes to the Power of Zero paradigm. For David, asking yourself 'Over what time frame should I be shifting my tax-deferred retirement assets to tax-free?' is one of the most important variables to consider when executing your Power of Zero strategy. David's view is to consider shifting money slowly enough so that you don't rise into a tax bracket that gives you heartburn, but quickly enough that you get all the heavy lifting done before tax rates go up for good. The problem, however, lies in the fact that if Congress were to do nothing between now and 2026, the Tax Cuts and Jobs Act will expire – leading to an increase in tax rates. When it comes to executing strategies, David recommends having an approach that isn't either too alarmist or heavy-handed. It's important to ask yourself what the Government is likely to do to tax rates, over what time frame, and act accordingly. Over at DavidMcKnight.com, you can find a "magic number" calculator in the upper right-hand corner of the webpage. The calculator shows you how much money you should be shifting to get to your IRA balance over a given time frame. David asks a key question: 'What if 2026 is not really the deadline we should be concerned with?' Perhaps, he says, 2026 may be regarded merely as the year in which tax rates return to historically normal levels. David refers back to the 2021 interview with Brian Beaulieu, an economist who has been working with Fortune 500 companies for the last four decades to predict what the economy is going to do in the future – and he has done so with an almost 95% success rate. According to Brian Beaulieu, the deadline we should really be concerned with is 2030, the year in which he predicts the U.S. will go into a Great Depression. The reason for this prediction is the trajectory of national debt and the increasingly high number of Baby Boomers reliant on Social Security, Medicare, Medicaid, and interest on the national debt. If Beaulieu's prediction were to be correct, it would mean that you shouldn't really be fixating on shifting your dollars from tax-deferred to tax-free over four years, especially if you have large amounts of money in your tax-deferred bucket. In this scenario, you would have the opportunity to spread your tax obligation out over a longer period of time, which would keep you in a much lower tax bracket along the way. For David, 2024 is going to be a key year for the fact that, if Republicans were to take the House, the Senate, or the Presidency, then there's a good chance that the Tax Cuts and Jobs Act would be extended for another eight years. As a result, the current low tax rates would be extended through 2032. However, this approach of "kicking the fiscal can" further down the road, would mean that the fix on the back end will be much more aggressive – something nobody would like on the back end. Mentioned in this episode: 2021 interview with Brian Beaulieu David's books: Power of Zero, Look Before Your LIRP, The Volatility Shield, Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube

The idea behind today's episode comes from a conversation David had with someone at a recent event he spoke at. He praised the LIRP as the "perfect Swiss Army knife-type of investment," and couldn't understand why more people didn't make it their only investment tool. David isn't a fan of conversations that position the LIRP as a "Holy Grail" of financial planning. David shares examples of questions and conversations of the arguments that may be made by someone who's a big believer in the LIRP in these terms. David discusses potential scenarios and conversations you may find yourself having. The Power of Zero strategy calls for multiple streams of tax-free income, none of which show up on the IRS' radar but all of which contribute to you being in the 0% tax bracket. There are four streams of tax income: the Roth IRA, the Roth 401k, the Roth conversion, and the RMD that's up to standard deduction limits out of your IRA. David discusses how they're being invested in, and how some licensed life insurance agents persuade people against investing in the stock market. As David illustrates, there are some shortcomings in the approach similar to the event attendee he was chatting with, as the approach doesn't appreciate the broader role that the stock market plays, in a balanced approach to tax-free retirement planning. The LIRP, especially that in the form of a puppy and in the form of the IUL Index Universal, can generate up to 5-7% annual rate of return. "The LIRP is not designed to be the primary source of retirement", says David. "Savings are designed to be a supplemental source of retirement savings". David goes over the type of life insurance agents you want to stay away from, and why you may want to embrace a stock market-type approach to investing. When it comes to the LIRP coming into play, the focus should be on an approach that involves both stock market and LIRP – as they both play an indispensable role in a comprehensive, and well-balanced, path to retirement planning. Mentioned in this episode: David's books: Power of Zero, Look Before Your LIRP, The Volatility Shield, Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube

Today's episode focuses on the difference between your effective and marginal tax rate and which one is relevant in different financial planning contexts. For David, the American tax system works exactly like a graduated cylinder: your money flows in and it goes all the way down to the bottom. Some of it gets taxed at 10%, some at 12, 24, 32, 35 or 37% – even Bill Gates briefly has some of his earned tax income tax at 10% before it goes all the way to 37%. David explains that the marginal tax rate is the rate at which you pay tax on the last dollar in your tax cylinder, while effective tax rate is your tax as a percentage of your table income. As a "rule of thumb", remember that your effective tax rate is always lower than your marginal tax rate. David shares that the single greatest decision on whether to undertake a Roth conversion is whether your tax rate will be higher now or in the future. He discusses a scenario in which you should use your marginal tax rate, and not your effective tax rate. Evaluating the benefits of certain deductions and calculating short-term capital gains are two additional scenarios in which you should use marginal tax rate. As a general rule, David recommends remembering that the higher your federal marginal tax rate, the more it makes sense to invest in a Roth IRA instead of in a taxable investment or brokerage account. 'Want to calculate what your effective tax rate is? Take your marginal tax rate and subtract 7,' says David. When it comes to mistakes, a common one people make is on deciding between the effective and the marginal rate – and this usually happens with a Roth conversion. Mentioned in this episode: David's books: Power of Zero, Look Before Your LIRP, The Volatility Shield, Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube

David explains how, normally, we think of the sequence of return risk as the risk associated with the order in which you experience investment returns in your stock market portfolio in retirement. There are a couple of different ways you can safeguard yourself against sequence of return risk. The first one is to allocate money to an annuity that provides for your income during those early years of retirement so that you aren't forced to take money out of the stock market. The second option is to build up cash value as long as you start with enough time before you retire. You can build up cash value inside your LIRP, and you can use that to pay for lifestyle expenses during the down years in the first 10 years of retirement. Lastly, you can shift money out of your stock market portfolio into what David refers to as time-segmented portfolios – short-term debt instruments designed to mature when you need the money. Segmented portfolios are a safe and productive way to mitigate sequence of return risk in the first 10 years of retirement. In Power of Zero, David describes 3 basic types of LIRP: the growth in your cash account being linked to investment bonds in the insurance companies of the general portfolio, the Interest Rate Sensitive Universal Life, and the so-called Variable Universal Life (VUL). For those of you who have VUL, it isn't necessarily time to panic, says Nelson. Mentioned in this episode: David's books: Power of Zero, Look Before Your LIRP, The Volatility Shield, Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube

There are dozens of contexts in which life insurance gets used, but 95% of the time, and from a Power of Zero planning standpoint, it gets used in two different ways. David explains how having a certain amount in your taxable bucket may sound great because it's liquid and you can access it, but by taking the inefficiencies in the taxable bucket, you amortize them out over the balance of your lifetime – and this may end up costing you hundreds and thousands of dollars. There are different ways you can skinny down your taxable bucket. The first one is utilizing your least valuable asset – your taxable bucket – and use that to pay for your lifestyle. Maximizing your 401k or, even better, your Roth 401k at work is a second way to skinny down your taxable bucket. The third way is to simply contribute to the Roth IRA. David suggests never letting a year go by where you don't contribute to the Roth IRA. The fourth way to skinny down a bloated taxable bucket, on the other hand, is by using those dollars to pay for the taxes on your Roth conversion. As David notes, if you're younger than 59 and a half, the only way to do a Roth conversion is if you have money sitting in your taxable bucket that you can earmark for the tax on that Roth conversion. And in case you try to have the IRS withholding tax from your Roth conversion when you're younger than 59 and a half, you'll get a 10% penalty even though you may be taking that money out and giving it back to the IRS in the form of taxes. If you're younger than 59 and a half, you can have taxes withheld directly from the Roth conversion itself, even though David doesn't recommend doing it. The last way you can spend down on a taxable bucket that has a balance that's far too high is by way of the LIRP. David explains that the LIRP is not designed to compete with your stock market investments, rather to serve as a bond replacement. Reaching into your investment portfolio, 'pulling out the bonds' and replacing them with the LIRP will get you a greater return, lower risk, and a lower standard deviation. It's just a more effective way to grow your money as a bond replacement. David sees growing your money between 5 and 7% without taking any more risk than what you're taking in your savings account as a safe and productive way to grow at least a portion of your retirement savings. David goes over how the LIRP can be much more efficient than simply growing dollars in the tax-free bucket.

David discusses how Mitt Romney is at the forefront of trying to save Social Security, Medicare, Medicaid, solve the national debt problem, all while simultaneously trying to save the country. In a recent interview with former Power of Zero Show guest Maya MacGuineas, Mitt Romney discusses something that should resonate with you if you care about national debt and the future of the country. David believes that if Romney were to get through the Trust Act he has proposed, he could very well save the Republic. And he appreciates the fact that while some may avoid saying things that could get them voted out of office, Romney isn't afraid to speak his mind – something that David sees as a sign of integrity. In his interview with MacGuineas, Senator Romney talks about the frightening issue of the additional debt and the already existing debt, and points to the fact that over $400 billion was spent on the interest alone in 2021. David sees raising interest rates as the only way to combat inflation. Argentina, which has its inflation at 50%, recently raised their interest rates 250 basis points, from 40 to 42.5. For Senator Romney, at some point, the U.S. is going to be spending more on the interest than they are on their military (currently $700 billion). He isn't sure as to how you can be the leader of the free world if you're having to pay hundreds of billions of dollars in interest and can't even keep up with your military, education, support your health care system, and so forth. David Walker, author of America in 2040: Still a Superpower? A Pathway to Success, shared a similar feeling on the Power of Zero Show about a year ago – saying that a country can't remain a superpower for long if it can't get a handle on its finances. In the interview with Maya MacGuineas, Mitt Romney also touched upon the importance of taking action before trusts such as Social Security, Medicare, and Medicaid run out of money. His words seem to indicate that dramatically cutting these programs for baby boomers isn't really in the cards, which leaves higher tax rates as the solution. An additional point Senator Romney made during his interview with MacGuineas is the fact that continuing to add debt at a time like this is threatening our future, as well as the future of our kinds and grandkids. Seniors need to be protected with Medicare and Social Security, as well as Medicaid and keep America strong. As history of great civilizations has taught us, a characteristic of their failures is the beginning of massive spending that was greater than the money that was taken in. For David McKnight, these possible solutions might be too little, too late, but he still admires Romney's willingness to discuss such a polarizing issue. In the interview, Senator Romney shares what he considers a possible solution to the issue at hand. And that is dividing the different trust funds and establishing a bicameral and bipartisan Rescue Committee of sorts for each one. This may not solve all four trust fund deficits but if a solution is found for any of them, and if it can bring balance and long-term solvency, it would create the impetus needed to take on the effort even further – and potentially solve all of them. David likes the fact that Romney brings Americans up by staying on the country's current fiscal path. Nobody would like for the U.S. to go bankrupt but people would like it even less when debt gets so large that the costs of service in it consumes the entire federal budget, and the benefits of the various programs would get cut dramatically. Baby boomers are the single largest voting block of the nation and they won't risk losing their Social Security, and Medicare benefits, as nobody wants to alienate that particular block of voters. However, it's going to be generation X and millennials who are going to pay the price – with Social Security age potentially being moved out to 72 or 75. Romney doesn't believe that most Americans realize that talks about balancing the budget are only matters related to one-third of the budget. David is encouraged by Senator Romney taking the problem head on, and identifying it as the foremost problem. He sees it as the type of leadership that David Walker called for in his most recent book. According to David, for people interested in adopting the Power of Zero approach to retirement, this means taking advantage of historically low tax rates while they're allowed every year. Mentioned in this episode: Interview between Maya MacGuineas and Mitt Romney

Mark Byelich doesn't know when taxes are ever going to be lower than they are right now. David sees Medicare, not Social Security, as the main issue because Medicare is five times more expensive and it's what's really going to be driving debt over time. David thinks that Social Security can easily be fixed by moving the age of retirement or by adding means testing like it happens in other countries. In his opinion, the challenge is how to renegotiate Medicare. It's what is increasing by 6% each year, on average. This, without taking into consideration that there are 10,000 baby boomers who are exiting the workforce. Mark confirms a question that was asked; the amount you can put in a Roth IRA annually, in 2022, is going to be limited. David believes that the direction capital gains are heading toward depends on who's in office. If you have Democrats at the Presidency, they're most certainly trying to raise them. Republicans tend to think that high capital gains affect the growth of the economy. If one leaves politics aside and looks at the math of it all, capital gains are going to have to rise precipitously – along with individual tax rates – or the U.S. is going to go broke as a country. David is a fan of extending the Roth IRA conversion period beyond 2026. In replying to a question that was asked, he discusses how he would prefer paying the 22-24% bracket up until 2026 rather than preventively paying the 32% bracket. He thinks that there is going to be a "perfect storm" in 2030; demographic, debt, and unfunded obligations – so you want to get things in order before then. There are a couple of things that have hit a nerve with David; bouncing into the 32% tax bracket and people wincing over IRMA. There's a trade-off, though; one can pay an increased IRMA in the short term to spare IRAs and Social Security from higher taxation over the long-term. If a person can get to 0% tax bracket in retirement by shifting most of their assets to tax-free, they would put themselves in a position where they wouldn't have to pay IRMA anymore, they wouldn't have to pay Social Security taxes anymore, and they would shield themselves from the impact of high tax rates down the road. David provides an overview of his books Power of Zero, Look Before Your LIRP, The Volatility Shield, Tax-Free Income for Life, and his upcoming one, the 75,000 word-long, The Infinity Code. David shares what is the greatest risk according to retirees; running out of money before you run out of life.

Normally, it takes a year to add $1 trillion to the national debt. With Covid-19, we have added $6 trillion to the debt. Something that usually happens in 6 years took place in 3 months. David believes that instead of cutting the various programs, the government is going to raise more taxes. Mark discusses main turning points of his career: being part of Ed Slott's mastermind group since 2011, seeing one of David's presentations, and getting a copy of The Power of Zero at a conference in San Diego back in 2015. Some of the studies Mark Byelich has done show that the average middle-class American will be in the 40 to 45% effective tax rate – within the next 10 years. David talks about the fact that some believe that rich people don't have the money for all that the government is offering. David answers a question related to what people should be doing. David wouldn't tell people 'Ok, we only have 4 years, now I'm going to bump up into the 32%.' David suggests people take advantage of these historically low taxes but don't succumb to the temptation to bump up into 32%. David discusses the fact that if Republicans were to get control of everything in 2024, they could extend the Trump tax cuts for another 8 years. For David, one of the tools they have to fight inflation is to raise interest rates. The problem is that the reason why the country is able to sustain this debt for a long period of time, is because the country has had historically low interest rates for so long. David shares something in the Constitution that says that the Federal Government is required to pay – simple work pensions, interest on the national debt, etc. Mark talks about the one item that's currently concerning him when it comes to the health of financial plans, and investing.