The Power Of Zero Show

David becomes very uneasy when advisors recommend that their clients take the money in their IRA and convert all of it into an LIRP. The LIRP has a lot of benefits, but it really should be used in conjunction with other streams of tax-free income. The LIRP is powerful only to the extent that it's used in collaboration with, in most cases, four to six other streams of tax-free income. That's when it really shines. An LIRP conversion is something that you would use with a client when there are no other opportunities for Roth or Roth conversions available. Most annuity companies are okay with you doing a Roth conversion, as long as you do it all in one year. What do you think the tax implications of that might be? There are some companies that allow what is known as a midair conversion, where you take a distribution from the IRA and then you convert it to a Roth IRA on the other end. This isn't very common though and most companies shy away from this. With the LIRP we get as little death benefit as the IRS requires of us and stuff it with as much money as the IRS allows in order to mimic all of the tax free benefits of the Roth conversion. As your annuity balance goes down, you will have to structure the LIRP just the right way, but if you do, your money will be able to grow in a completely tax-free environment. The average expenses over a year over the life of a LIRP are about the same or a little less than a typical IRA or 401(k). Not only are you able to grow your money in a tax-free environment, but you're also able to get a death benefit that doubles as long-term care. The second scenario where an LIRP conversion makes sense is in a situation where you are a non-spouse inheritor of an IRA. If you are a spouse that inherits an IRA, you can do a Roth conversion without any issue, but that's not true for a non-spouse. They will be required to take RMD's on that IRA over their life expectancy. You can't convert an inherited IRA and turn it into a Roth IRA. You can put that money into a traditional IRA, but there are limitations and that's where a LIRP conversion can be very useful. If you believe tax rates are going to be higher in the future and have inherited an IRA, the natural place to put that money may very well be in a LIRP. An LIRP conversion is not an officially recognized term, but the idea is very useful. If a Roth conversion is not available, an LIRP conversion is your next best option. With an annuity with a 10% withdrawal limitation, that is a great place to start shifting money to an LIRP.

There are two people today that are making waves in the national conversation for what they are saying about the national debt. This first is Ken Fisher. Ken says the debt to GDP ratio has been worse in the past and that we really have nothing to worry about. He also says that we borrowed some of that money from ourselves, so it's really just an accounting issue. The trouble is, that's all untrue. We owe the money to Social Security and that money has to come from somewhere. Social Security is underfunded and will need to be paid back, either through higher taxes or spending cuts. Ken Fisher is trying to persuade us the stock market is going to go up in perpetuity, which is basically what he said just prior to the crash of 2007. There is one person on the right side of the aisle who is the opposing voice on the debt issue. Mark Sanford is a GOP candidate running against Trump. Mark doesn't believe we have 8 to 10 years before the coming crash, which is why he's running now. He's injecting the topic into the national debate by running for president, despite the very long odds he will succeed. We don't have the luxury of waiting four years until the next presidential cycle to have this debate. The storm may already have come in 5 years. Tom McClintock has said something similar, namely that the United States will resemble Venezuela in 8 years. The financial storm will be something that we have never seen before. A sovereign debt crisis is looming, which is the straw that could potentially break the camel's back. Our math doesn't add up in Washington. The current financial condition of the country is like a family running up their credit cards to create the illusion of real wealth that gets wiped out when the financial storm hits. While all the other countries in the world are getting their financial houses in order, the US is just piling on their debt. This is not all the current president's fault, but he's not helping the situation either. We are living in a dream world if we believe that the national debt is only $22 trillion. All the other governments in the world follow fiscal GAAP accounting except the US. We would have to have $239 trillion sitting in a bank account today earning treasury rates to be able to deliver on all the promises. Who's right? Ken Fisher or Mark Sanford? One has everything to gain where the other has nothing to gain except maybe averting a disaster. If you find yourself in the position where you or your clients have large amounts of money in tax deferred investments, you have a freight train bearing down on you. Take advantage of the next 7 years to position that money to tax free or you may not be able to keep as much of that money as you thought. The Secure Act will most likely be snuck into a spending bill at the end of the year. It means that if you die with money in your IRA's and it goes to a non-spouse beneficiary like your kids, they will have to spend that money over 10 years. That means they will pay taxes on it at the apex of their earning years when they can least afford to pay the taxes. People will start seeing the writing on the wall and take advantage of Roth conversions, Roth IRA's, and LIRP contributions with Power of Zero advisors across the country.

What are the implications of taking your pension normally versus a lump sum? A lot of companies offer the lump sum as a way to get out from under the financial obligation of paying you or your spouse until you die. As a stream of income, your pension will be coming out of your tax-deferred bucket. You also have to realize that once you opt to take your pension as a stream of income you are stuck with that choice regardless of what tax rates are in the future. It will always come out of your tax-deferred bucket, with all the unintended consequences that go along with that. That doesn't mean you should always take the lump sum option, but it can be a good deal. You just have to crunch the numbers and understand the tax implications of your choice. When you take your pension as a stream of income, it counts as provisional income, so in most cases you can count on it causing your Social Security to be taxed. Anything you take out of your other retirement plans will land right on top of that income and be taxed as well. When 85% of your Social Security gets taxed, which is a situation many people will find themselves in, it forces you to spend down your other assets much faster. You could run out of money 5 to 7 years faster than people who do not have their Social Security taxed. You can spend your other assets down much faster than you planned, in an attempt to compensate for Social Security taxation that's brought about by electing to take your pension as a stream of income. When you're taking a pension stream of income in retirement, it is 100% exposed to tax rate risk because it is coming out of your tax-deferred bucket. That means you are going to have to find a way to compensate, and when tax rates increase in the future it's going to be double hit. A lump sum distribution allows you to roll that money into an IRA. Once it's there, you could do a Roth conversion and place it into the tax-free bucket. If you're really bent on having a stream of income you could use a deferred income annuity, which would create that stream of income in a tax-free environment. Pensions are becoming more scarce, only 40% to 50% of the people we see everyday have one. Most people have 401(k)'s or 403(b)'s. If you do have a pension, you should explore a lump sum distribution before you opt to take that stream of income. You should be aware of your options before you have to make that choice.

Line 10 on your tax return can be a great joy for you in retirement. Before the tax cuts of 2018, you may have known it as Line 43, and it simply means your taxable income. Taxable income is important to someone trying to achieve the Power of Zero paradigm because in a rising tax rate environment there is an ideal amount of money in both your taxable and tax-deferred buckets. Anything above those amounts should be repositioned to tax free. That's approximately six months of living expenses in the taxable bucket, and in the tax-deferred bucket. The ideal balance is low enough that your required minimum distributions are less than or equal to your standard deduction in retirement. When you're shifting money from tax deferred to tax free, you create a taxable event, and to understand how much your going to pay in taxes, you need to know your taxable income. This is where Line 10 on your tax return comes in. Your Line 10 number will inform how much you can shift in a given year before bumping up into the next tax bracket and how much heartburn you will be exposed to. How do you get to your taxable income? Start with your gross income and then subtract your "above the line" deductions like contributions to your traditional tax deferred plans. Once you're at your adjusted gross income, to get to your taxable income you have to decide which one is greater: your standard deduction or your itemized deductions. You need to understand the implications of any shifting you do from tax deferred to tax free and you can't do that without figuring out what your taxable income is. The marginal tax bracket is also the tax rate at which you save taxes when you do something that generates tax savings like taking out a mortgage. Most people we meet are in the 22% tax bracket so they aren't too upset about doing enough shifting to get to the top of that tax bracket, but they should also take advantage of the 24% tax bracket as well. The 24% tax bracket is only 2% higher than the 22% tax bracket, but it allows you to shift another $150,000 each year before hitting the top of that bracket. If you have a $1 million in your IRA right now, you're going to need to shift $125,000 each year over the course of the next seven years to get to the right amounts in your tax deferred and tax free buckets. Ultimately you have to ask yourself are tax rates going to be higher in the future than they are today. If you believe they will go down, then hold off on the Roth conversion. If you believe they are going to be dramatically higher, then line 10 on your tax return will be a good barometer for what the implications of shifting will be. Check out your line 10, figure out what marginal tax bracket that puts you in, and then ask yourself how much room you have to shift before you get to the next level. Remember your pension and social security taxation will fill up your first two tax brackets, and any money that comes out of your IRA's or 401(k)'s and will be taxed at the future equivalent of the 22% tax bracket.

Over the years David has noticed a number of advisors who have professed to be Power of Zero advisors, but there are a number of significant shortfalls in their approach. A true Power of Zero advisor believes that tax rates are going to be higher in the future than they are today and knows how to defend that position. They understand the national debt and the true amount of the unfunded liabilities as well as the implications of those things. In a rising tax rate environment, there is an optimal amount of money to have in your taxable and tax-deferred buckets. Regardless of the direction tax rates go in the future, your taxable bucket should contain about six months of living expenses. The real litmus test for the Power of Zero paradigm is in how much should be in the tax-deferred bucket. For most people that number is around $350,000. You can have too much money in your tax-deferred bucket, and when you do it unleashes a cascade of unintended consequences that could potentially lead to social security taxation. A true Power of Zero advisor believes in the idea of multiple streams of income. If your advisor says all you really need to get to the zero percent tax bracket is a Life Insurance Retirement Plan or something similar, that's a tipoff that they haven't really embraced the paradigm. It's nearly impossible to get to the zero percent tax bracket by relying on just one stream of tax-free income. Each type of tax-free stream of income has a strength and is able to accomplish things that the other types can't. They should be used in conjunction with one another to get to the zero percent tax bracket. The holy grail of financial planning is when you can use your standard deduction to offset your required minimum distribution from your IRA. The LIRP has its own set of advantages. It allows your money to grow safely and productively, has low fees as long as you keep the plan for your lifetime, and you get a death benefit that doubles as long term care insurance. Social security helps mitigate against a number of risks, including longevity risk, sequence of returns risk, inflation and deflation risk, and the longer you live the greater your return on the program. An advisor should be able to talk about all the advantages and disadvantages of all these things. A true Power of Zero advisor recognizes the importance of the date Jan 1, 2026, when tax rates revert to what they were in 2017. You're going to have to pay taxes now or later, so why not pay them when they are at historically low rates? When the tax sale is over January 1st, 2026, it's over for good. According to Tom McClintock, in eight years the US will be in the same boat as Venezuela. A true Power of Zero advisor would never lock up a significant portion of your assets in the tax-deferred bucket in the form of an annuity that didn't have Roth conversion features. Annuities have a lot of benefits in retirement but there are unintended consequences associated with having that income in your tax-deferred bucket and have it be stuck there forever. If you're giving up a portion of your Social Security or other guaranteed lifetime stream of income to taxation, you're going to have to spend down all your other assets that much faster. A true Power of Zero advisors wants to create those streams of tax-free income but they want to do it in the tax-free bucket. Once you start taking a stream of income from your tax-deferred bucket, your ability to get it out of the tax-deferred bucket is gone. Absent any one of these worldviews, you have a hole in your Power of Zero retirement game.

Social Security can indeed be taxed, despite the feeling that you're getting taxed twice. This year, 89% of all federal tax revenue is only going to go towards four things: Social Security, Medicare, Medicaid, and interest on the debt. These are non-discretionary spending items. It would take an act of Congress to choose not to pay for them and doing so would result in a worldwide depression. That means that only 11% is left to fund everything else in the budget and that doesn't include the additional trillion dollars we spend above and beyond the federal tax revenue. We are going to come to a point where we have a sovereign debt crisis and will have to either dramatically reduce spending, increase tax revenue, or some combination of both. Provisional income is the income that the IRS keeps track of to determine if your Social Security will be taxed. Any 1099's coming out of your taxable bucket, including investments that generate income or dividends, count as provisional income. The same is true for any distributions from qualified plans and 401(k)'s in your tax deferred bucket. Most people have no basis in their 401(k). They used pre-tax dollars to fund those accounts and when they take that money out the IRS is going to count 100% of it as provisional income. Any sort of taxable income that accrues to you during retirement will count as provisional income. The kicker is one half of your Social Security counts as provisional income. If, as a single person your provisional income adds up to $25,000, or as a married couple it adds up to more than $32.000, up to 50% of your Social Security can become taxable to you at your highest marginal tax bracket. It's important to remember that your standard deduction has nothing to do with your provisional income. Interest from your municipal bonds counts as provisional income, which is the reason we aren't very keen on them since they don't count as true tax-free investments. There is a longform process you can use to determine your provisional income, but there is also a short cut. Many people think that provisional income is based on a threshold and if they exceed that number, they are taxed at their highest marginal tax bracket, but that's not how it works. It's graduated, so you have to get well above the threshold to feel the full brunt of the tax. Somewhere between $80,000 and $85,000 in provisional income is where your Social Security will be taxed at your highest marginal tax bracket. Many financial advisors think about provisional income incorrectly. We have to recognize that provisional income works in a graduated system and there are ways to keep your provisional income low enough to make your Social Security tax-free. You have to remember that even before you take the first dollar out of your IRA, you are already at the 50% mark, so you have to keep the balance of your IRA low enough that the RMD coming out of it will keep you below the threshold. For most people, the magic number is around $350,000. Why is it such a big deal to keep your Social Security tax-free? The way that most Americans pay taxes on their Social Security is by taking more money out of their IRA's and 401(k)'s, but what happens if tax rates double? When your Social Security gets taxed, you run out of money 5 to 7 years faster than someone that isn't having the Social Security taxed. The act of compensating for Social Security taxation forces you to spend down your other assets that much faster.

When you come from a tax-deferred paradigm, it can really skew how you view the types of accounts that you are accumulating dollars in. The main thrust of the reviewer's critique is that we shouldn't focus on minimizing taxes if that means that investment fees will leap up over the course of retirement. Of course, you shouldn't build your financial plan while only considering taxes. If you look at the financial path the country is on, we can make some educated guesses on the future of tax rates and adjust our financial strategy based on that. The Power of Zero paradigm essentially means that if tax rates are going to be higher in the future than they are today, then there is a mathematically ideal amount of money to have in your taxable and tax-deferred buckets. Anything above that should be systematically transferred to tax-free. Life insurance policies do have higher fees than other potential investments, but only if you don't keep the policy for your entire life. If you do keep it for your whole life, it becomes very inexpensive. To say that you can go out and get useful advice about retirement for less than one tenth of 1% is to say that you are working with an advisor that isn't making any money. The key is that if you're going to work with someone who is going to help you navigate all the pitfalls that stand between you and the zero percent tax bracket, that person is not going to work for free. The average rate of return of the S&P 500 over the last 30 years is about 8%, but the average return enjoyed by most investors is between 1% and 3% because they make decisions emotionally. If you're paying 1/10th of 1% to an advisor, you are getting what you pay for, and you will definitely not get any advice on when to move money from taxable and tax-deferred to tax-free. When you take a loan from your life insurance policy, it's not actually coming out of the policy, it's coming from the insurance company with your policy, being used as collateral. There is a reason why hedge fund managers and banks are the biggest purchasers of life insurance. All life insurance loans are tax-free, but not all of them are cost-free and we're looking for both. Roth accounts are mentioned all throughout the Power of Zero book because they come with a lot of advantages, but one of the things you can't get is the safe and productive growth you can get from the LIRP. The biggest selling point of the LIRP is the death benefit that doubles as long-term care. Baby Boomers are recognizing that one of the single biggest risks they face is long-term care. David has never argued that the LIRP should be used instead of Roth accounts, it should always be used as another stream of tax-free income alongside those accounts. We know that 53% of our country pays all of the taxes, with 80% of that being paid by the top 20%. In order to keep social security, Medicare, and Medicaid, we have to widen the tax base because we just don't have enough people paying enough to keep them going. If the highest marginal tax rate goes up, that has historically been a signal that the other tax rates will likely be going up as well. With the money that has been promised for those programs, there is not enough money available if we just tax the rich so that means the other tax brackets will have to go up in tandem. David Hays found his mother's tax return from the year he was born where they were paying around 30% of their income in taxes, despite not making much money. Even middle class people in the past paid comparatively high taxes, so don't rule it out. There are different viewpoints when it comes to the Power of Zero paradigm but you have to understand the relevant data before dismissing everything.

The IRS has a test called the seven pay premium test. It basically states that it's possible to put too much money into a life insurance policy. If you fail that test than any loans that you take from your life insurance policy get treated differently. Traditionally, if you obey the rules of the IRS you put money into a life insurance policy after tax and if you take the money out the right way you can do it tax free, typically by way of a loan. The alternative is to take the money out of a non-MEC life insurance policy with a policy withdrawal. This happens on a first-in, first-out basis, which essentially means that you can take out the money in your basis tax-free, but anything from the growth portion of your account will be subject to ordinary income taxes. Anything above the basis, you would take out in the form of a loan from the insurance company itself. However, there are some policies that allow you to take out variable or participatory loans against the whole amount. Many people do Modified Endowment Contracts on purpose. In either case, the money will go to the heirs tax-free. The big difference is the order of the withdrawal structure. With an MEC policy, the order is last-in, first-out which means you will pay tax on the growth first before getting to your tax-free basis. If you're younger than 59 and a half, you will also pay a 10% penalty on any loan or withdrawal from a MEC policy. This can have major implications if you end up using the contract the way that most people do, as it can end up being the worst investment you will ever make. The advantage to a MEC policy is that you can get a large lump sum into the policy early on and take advantage of the time value of money. You just have to recognize that you want to have the right amounts of money in the right accounts in a rising tax rate environment. If you want to change your existing life insurance policy you can do a 1035 exchange and roll that money tax free into a new policy, but there are some things to watch out for. Once a MEC, always a MEC. There is another thing you can do with a 1035 exchange where you can take the money in a non-MEC life insurance policy and roll that into an annuity. Once it's an annuity, you will lose any ability to take money out tax-free, but the option is there if you need an escape hatch from your current life insurance policy. The shift only goes one way, you can't take an annuity and roll it into a life insurance policy.

The number one criticism of the Life Insurance Retirement Plan online is that the fees are simply too prohibitive, but the question is really what are they expensive compared to? The best way to compare the fees is to think about where else you could be putting your money, in most cases that's going to be some sort of investment. When it comes to typical investment fees, you're looking at an expense ratio of 1.5%. The baseline number to compare the fees with the LIRP is that 1.5%, which means you have to consider whether the LIRP is more or less expensive than the traditional 401(k) account. The LIRP is a bucket of money that grows tax free, there is no contribution limit or income limitation, you don't pay taxes if you take the money out in the right way, it doesn't affect provisional income and there isn't likely to be any legislative changes down the road. The IRS requires that a certain amount of money flows out of your LIRP in order to pay for certain expenses. The expenses in the LIRP are likely to be much cheaper than what you are paying in your 401(k) or IRA. The fees are a little bit higher in the early years of the LIRP compared to other accounts, but the fees drop off a cliff after the eleventh year. When you average out the fees over the life of the program, it's going to cost you less than the 1.5% baseline. Don't do an LIRP if you don't plan on keeping it for your whole life. There are a lot of benefits to the plan that only make sense if you keep it until you die. If you do plan on keeping it for your whole life, why would you be concerned with the higher fees in the beginning instead of considering the impact over your lifetime. Since the plan isn't a short term investment, it doesn't make sense to only pay attention to the negative return in the first six years. The longer you keep the plan the closer your internal rate of expense gets to 1%. If the internal rate of return reflects a 1% expense over the life of the program, it might as well have been that rate for the entire time. The costs are significant over the first ten years, but if you stick with it for the rest of your life the more dramatically the expenses reduce and the better the internal rate of return becomes. The LIRP may come with expenses but you also get advantages by paying those expenses. If you could get a 6.5% return without taking any more risk than you are accustomed to taking in your savings account, would you? The expense issue with LIRPs is overblown. We have to contextualize the expenses within the broader picture and also consider the benefits it conveys over the course of our lifetime. LIRPs are not a silver bullet, they should complement your other tax-free streams of income. If you put it all together just the right way you get to be in the 0% tax bracket. When you have the right levels of money in the right accounts, that's how you reach the 0% tax bracket, but if some of those levels are off you are not going to make it so make sure you work with a trained professional. The LIRP also operates as a solution for long term care in addition to all the other advantages that it comes with.

You will find articles on the internet that claim that if you are going to do a Roth Conversion you have to do it a number of years before retirement, because you must have the ability to recuperate the dollars you've paid towards tax, but that doesn't stand up to the math. David goes over the example of two brothers, each taking a different approach to investing $100. One goes for the tax deduction on the front-end approach, and one for the tax-free approach. The moral of the story is that most people believe that if they have $100 in an account and it doubles to $200, that $200 is theirs, but they don't actually have $200 because the IRS is going to take their cut one way or another. As your portion of the invested money grows over time, the IRS's portion grows over time as well. In a level or stable tax environment, both the IRA and the Roth IRA are worth the same amount of money. The value of the Roth IRA has nothing to do with having enough time to recover from the taxes you pay on the Roth Conversion. The same math holds sway no matter the approach you take. It comes down to whether you think the taxes you pay on the front end will be greater or less than the tax you will pay on the back end. The only variable that really matters is expected tax rates. If taxes are higher in the future, the Roth IRA is the better choice. If you believe tax rates will be lower in the future, than go for the IRA or 401(k). Always be asking yourself where you think tax rates will be in the future. This is why David focuses on conveying the financial reality of the US. The unfunded liabilities of the country are close to $239 trillion at this point. If you think that tax rates are going to be higher in the future to help keep our country solvent, then the tax free worldview is the way to go. It's okay to keep some money in your tax deferred bucket to offset your standard deduction in retirement, but for most people the sweet spot is somewhere between $250,000 and $350,000. The people who aren't sure if the Roth IRA is worth it or not need to crunch the numbers year by year, and see that there is no catch-up period. The myth around Roth Conversions is not accurate. If after examining all the evidence and you believe that tax rates will be higher in the future, don't believe all the nonsense around Roth Conversions. The math is always on your side if tax rates are going to be higher down the road than they are today.