The Power Of Zero Show

A true tax-free investment will meet two basic tests. They will first be free from every type of tax which means free from federal tax, state tax, and capital gains tax. The second thing is that the investment can’t count as provisional income. Roth IRA’s meet all those criteria as long as you are at least 59 and a half. Anything with the word Roth in front of it should be embraced as a truly tax-free investment, including Roth IRA’s, Roth Conversions, and Roth 401(k)’s. You can’t make a significant amount of money and invest in a Roth IRA. As a married couple, if your combined earned income is between $193,000 and $203,000, your ability to contribute to a Roth IRA gets phased out. If you make too much money there are other ways to contribute money to tax-free accounts, like a back-door Roth or the LIRP. Anyone of any age can contribute to a Roth IRA as long as they have earned income. The only exception to that is alimony. We should all know what the Roth contribution limits are. As of 2019, for a single individual, the limit is currently $6000 per year. The Roth 401(k) has different contribution thresholds. Someone younger than 50 can contribute up to $19,000 per year. Someone older than 50 can contribute up to $25,000 per year. You can do both a traditional Roth IRA and a Roth 401(k) in the same year. Roth 401(k)’s do not have income limitations as opposed to the traditional Roth IRA. For couples that make more than $203,000, that is an important option. Roth conversions do not have income limitations. Even Bill Gates could convert the money he makes each year to a Roth conversion. If you are at a high marginal tax rate you have to assess if it makes sense and is worthwhile to do so. Roth conversions do not count towards your modified adjusted gross income threshold of $203,000 as a married couple. Roth conversions will not prevent you from doing any sort of traditional Roth contributions.   Tune in next week for Part 2 of 15 Things You Should Know about the Roth IRA.

Micheal Coleman texted a glowing testimonial to David about his latest book, “The Volatility Shield.” We often talk about why your taxes could double in an effort to keep the country solvent because of the vast unfunded obligations like Social Security, Medicare, and Medicaid. However, there is another scenario where your tax rates can double that has nothing to do with those factors. David relates the story of a limousine driver that he met that was quite proud of his financial planning. He had a pension and a 401(k) with a million dollars in it, and felt like he had everything set up just right. The first question to ask is, “what tax bracket are you in?” It’s important to figure out where you are in the tax cylinder, because you want to know the cost of implementing any sort of asset shifting recommendations. The driver was in the 15% tax bracket at the time, but David pointed out that if he or his spouse died that would be more like the 25% tax bracket. In terms of advice, if all the driver did was shift the maximum allowable amount within the 15% tax bracket into a Roth IRA, he would be able to protect $35,000 per year as long as both spouses were alive. If there is a possibility that you or your spouse will pass away in the next 20 years, your tax rate is going to double no matter what. The Power of Zero principles can help protect you from more than just the risks associated with the country becoming insolvent. When you file as a single taxpayer, you hit each subsequent tax bracket twice as soon. If you are living on the same amount of money as you were when you were married, you could find yourself with a marginal tax rate that has doubled. Systemically repositioning money from tax deferred to tax free allows you to avoid this scenario, and pay tax rates that are still historically low. It not only allows you to take out your money down the road tax free, if it goes to your heirs they also get to receive it tax free, at a time where tax rates will likely be much higher and they can least afford to pay them. Shifting money to tax free doesn’t just benefit you, it can also benefit the people that will spend your money after your death. You don’t want to scrimp and save your whole life only to give up to 50% of your money to the IRS. If you’re in the slow-go years or the no-go years you’re likely in a low tax bracket. So, it makes sense to figure out what your current tax bracket is right now, and compare that to what your children would pay if they were to inherit your tax deferred assets.  If you’re in the 22% tax bracket it makes sense to look at what the 24% tax bracket can do for you in terms of your ability to shift money to tax free.  Even if tax rates don’t double to keep the country solvent, they can still double for you. If that happens, it will be too late to do the Roth Conversion because the conversion will be done at the doubled tax rate.  We are at historically low tax rates, especially for married people, so take advantage of them while you still can.

In 2012, there were two Acts that came out in Puerto Rico that gave people massive tax incentives to move their business there. Act 20 says that if you own a qualified business and move it to Puerto Rico they will waive your federal tax, your state tax, and they will charge you a flat 4% tax. You have to become a Puerto Rican citizen in order to take advantage of the Act. Act 22 is even better, this Act says that Puerto Rico will also waive all your capital gains tax. This is why hedge fund managers and real estate tycoons tend to live in Puerto Rico. There used to be a lot of stipulations around the Acts but they have since relaxed them a bit to mainly living in Puerto Rico for at least 183 days out of the year. You can also live in Europe for the majority of the year and still maintain your tax status in Puerto Rico, it only matters if you live in the mainland US. There are some downsides to Puerto Rico you should keep in mind. When hurricanes come there is usually little opportunity to leave so you just have to batten down the hatches and wait out the storm. You also have to deal with the fact that it’s a tropical island that tends to move relatively slowly. When people ask when I’m coming back to the mainland, I tell them “I’m coming back when I’m sick of not paying taxes!” You do have to give up a lot of the amenities of the US. Seeing a doctor can occasionally be a challenge so it’s not for everyone. The lesson I learned from living in Puerto Rico is that when you pay taxes in the United States you do get infrastructure improvements in exchange. You have to temper your expectations around services in Puerto Rico and understand what the nature of living on the island is all about. Harry Dent is a demographic investor that has made several accurate predictions and is one of many people that have decided to live and work in Puerto Rico. Act 20 and 22 were established to convince successful businesses to come down to Puerto Rico and stimulate the economy. In many ways, the economic circumstances have gotten so bad in Puerto Rico that many people are fleeing the island to go to the mainland at the same time that Americans are fleeing to Puerto Rico. You have to be willing to turn your life upside a bit but Puerto Rico is a possible tax paradise for the right person.

The math demonstrates that our elected officials have made promises that they can’t possibly afford to deliver on in the form of Social Security, Medicare, and Medicaid. To avoid getting voted out of office, they are likely to raise taxes dramatically in the future and the people who will suffer the most are the ones who have the majority of their retirement savings in 401(k)s and IRAs. The taxable bucket is the least efficient bucket to keep your money in, given that in reality, the optimal amount to keep in this bucket is around six months of living expenses. Anything else should be shifted to a tax-free account. $22 trillion of Americans’ retirement money resides in tax deferred accounts. Because of how easy it is to invest this way, this is where we save most of our money. Financial experts told us 20 years ago to do it and due to force of habit we still do. We are also addicted to the tax deduction on the front end which the government is more than happy to give us. We must remember that the true purpose of our retirement account is not to give us a deduction, it’s to maximize cash during a period of our lives where we can least afford to pay the tax. Some people believe they should get every dollar into the tax free bucket but that’s not necessarily the case. If you shift all of your money from tax deferred to tax free, your standard deduction is wasted so we want to leave some money in the tax deferred bucket to take advantage of that. For most typical American retirees, the amount is somewhere around $300,000. New legislation may force us to change the way we take money out of an inherited IRA. If this occurs, depending on the state you live in, it could cost you up to half of the IRA because you will have to withdraw the money on the IRS’s terms. This is another reason to accumulate dollars tax-free because doing so can really insulate you from this type of legislation. For an investment to be considered tax-free it has to be free from federal, state, and capital gains tax. It also has to not count as provisional income. Roth IRA’s, 401(k)’s, and conversions all count as tax-free. There is also a strategy known as the Life Insurance Retirement Plan (LIRP) that mimics a lot of the features of the Roth IRA, is available to everyone, and does a lot of things that other tax-free accounts do not. There has been a lot of negative feedback about programs like the LIRP, some of it justified, but a lot has changed in the last 15 years. Not everyone has been kept apprised of these changes, and it’s now a very dynamic tool that can be very productive while also protecting you from long-term care events and stock market fluctuations. The first step, if you want to implement the Power of Zero paradigm, is to find a qualified expert to help you. Not all financial experts are created equal, ask some questions and find the right person to help you. We now know the year and the day when tax rates will go up: Jan 1, 2026. When they go up, they will go up quite a bit. We have a seven year window of opportunity to take advantage of historically low tax rates. You should try to spread the tax liability out over the next seven years so that you don’t bump up into a higher tax bracket but still get all the heavy lifting done.. If you let a single year go by without taking advantage of these historically low tax rates, your window narrows and you will probably rise into a higher tax bracket to get it all done. Strike while the iron is hot and take advantage of the next seven years because once they’re gone, we are not likely to see taxes this low again in our lifetimes. When you do something by design, it means being proactive. If you’re proactive today you can extend the life of your investments and you’ll find you have more money to spend in retirement.

David has been in the industry since 1997, serving people and trying to insulate them from the coming tax storm. David’s wife and seven kids live with him in Puerto Rico, and he’s written several books to get the word out to the American people. David Walker was the former Comptroller General of the federal government, and in 2010 he created a movie called I.O.U.S.A. In that movie, he talked about how we are marching into a future where we are likely to go bankrupt as a country. David Walker is one of the key people that has inspired David to talk about these issues, along with Larry Kotlikoff. 10 years later, it seems like no one is talking about the issues anymore. Not a lot of people are aware that tax rates will be higher in the future than they are today. Even with the people that do believe the message, they haven’t done much about it. David does about 70 or 80 presentations a year, and the people he talks to seem to recognize that we are in tough fiscal straights. Once they get educated, people recognize that math doesn’t lie, and if they want to be prepared for retirement they have to dramatically change the way they do things. Politicians are very reluctant to control spending, because their number one job is to get elected. The biggest voting block in the US is the Baby Boomers, and the easiest way to not get elected is to talk about cutting Medicare, Medicaid, and Social Security. In the Power of Zero movie, Tom McClintock talks about the concept of a sovereign debt crisis. That’s where other nations will no longer loan you money, and since Medicare and Medicaid is pegged to inflation, that scenario basically leaves us with dramatic and draconian increases in tax rates as the only viable option. The states are not immune to unfunded liabilities. 75 million Baby Boomers are making a bet, whether they know it or not, that tax rates will be lower in the future than they are today by leaving their money in 401(k)’s and IRA’s. David Walker famously talked about why tax rates will basically have to double in the next ten years because we can’t grow our way out of the problem, or print our way out, and people will not lend us the money. Tax rates will have to double in the next ten years if we don’t start cutting these programs in a dramatic way. For every year we don’t cut Social Security by a third, the harder the fix becomes on the back end. There are millions of different types of investments, but they all fit into one of three types of buckets. The taxable bucket typically contains things like money markets, CD’s, and brokerage accounts. The taxable bucket is the least efficient way to save your money. Every dollar you give to the IRS is a dollar that you don’t get to invest and grow for your future, which is why David recommends that you only keep your emergency funds in the first bucket. The majority of the Baby Boomer’s savings are in the tax deferred bucket. David likes to describe this bucket as going into a business partnership with the IRS, where they get to vote on what percentage of your profits they get to keep. This can make planning for retirement really difficult because you can’t really know how much money you actually own. The last bucket is the tax free bucket. If you believe that taxes will be higher in the future than they are today, it makes sense to pay the tax today and then take it out tax free later on. At that point, you have divorced yourself from the IRS and own that money. If you’re in the zero percent tax bracket, it insulates you from higher taxes. Even if tax rates double, two times zero is still zero. The taxable bucket can be very useful since it’s very liquid and easily accessed. The optimal amount to hold in your taxable bucket is around 6 months of basic living expenses. Any investments in this bucket should be low risk and non-volatile. Living a richer life by design means being more intentional and proactive when it comes to retirement planning. We have been lulled into the traditional paradigms, and people have to remember that the purpose of your retirement account isn’t about getting a tax deduction. It’s about maximizing your cash flow during a period of your life when you can least afford taxes. The Power of Zero worldview really embodies the by design perspective.

There are two pieces of legislation that are working their way through the House and the Senate. The goal of which is to incentivize and encourage people to save more often and save earlier, but there’s more to them than that. The Setting Every Community Up For Retirement Enhancement Act (SECURE) is the legislation moving through the House. The Senate has their own version of a similar act. Both pieces have a lot of things in common, namely they both want to create retirement plans that have annuity options within them. They also want to require retirement plans to tell the contributor at least once a year what their lump sum would equate to as an annuity payment. It’s about income, not assets. Imagine knowing how much per month you would be getting out of your retirement account once you retire at the age of 65 at the top of each statement you get. There is talk in the House measure to push the required minimum distribution from 70.5 all the way up to 75. For most people this won’t affect them, it will affect people who are not dependent on their RMD’s right away. This could eventually force them into a higher tax bracket. RMD’s are designed to force you to liquidate your IRA vehicles before you die. If they are pushing back the age limit, they may also force you to take more money out and subsequently increase the amount of taxes you’re going to have to pay. If you consider the current rules around inheriting an IRA right now, the RMD’s would reflect your expected life span. This means you probably wouldn’t be forced to take much each year if you’re relatively young. In the proposed legislation, you could instead be forced to liquidate the inherited IRA in only 10 years and be forced to pay taxes at your highest marginal tax bracket. This could be considered to be a huge tax grab by the IRS. On one hand, they appear to be making it easier to save more money, but what happens on the backend? Some of the proposed provisions will help, but there are a couple of things in the legislation that will cause some major issues from a tax planning perspective. Some version of the bill will likely be signed into law. All this really does is underscore the need for tax planning, and shifting money from tax deferred to tax free. Keep in mind that if the money goes to a spouse, they won’t have to spend the money over a ten year period, but as a widower their tax bracket just gets cut in half. That means it’s much easier to hit the higher levels of marginal taxes. This legislation is all the more reason to proactively pay taxes on these accounts at historically low tax rates. At the very least it could significantly help out your heirs, as they will probably be at a point in their lives where they are paying very high taxes and could probably use some help.

The simple answer to the question of whether or not you can have too much money to get to the 0% tax bracket is no. The thing someone would be afraid of in that regard is paying so much tax in the process that it wouldn’t make sense to try to get there. It really comes down to whether the next seven years will be a good deal in terms of how much taxes you can pay now versus pay later. Much of the answer relies on Required Minimum Distributions. RMDs are designed to force you to pay taxes on all the dollars in your tax deferred account before you die. There is about $22 trillion in the cumulative retirement accounts in the US and the IRS wants to have some tax predictability. If you have $5 million in your tax deferred bucket for example, you’re going to be forced to take out roughly $175,000 each year, and before you know it, you could be in the highest marginal tax bracket. The whole point of the Power of Zero world view is that tax rates are going to be dramatically higher in the future than they are today. The equivalent of the 37% tax bracket after 2026 could be 50%. You have to look at everything in context. Another thing to keep in mind is that not all couples die at the same time. There could be a number of years where you end up basically paying double the taxes after your spouse dies. There is currently legislation in the House and the Senate that could eliminate the ability of your children to stretch out your IRA money out over their lifetimes. Currently, if you are a non-spouse beneficiary you can stretch out the RMDs over your lifetime, which can allow you to avoid bumping up into a higher tax bracket. The legislation would force you to pay taxes over a ten-year period. What would happen to your beneficiaries if they were forced to receive hundreds of thousands of dollars each year? They would likely pay tax at the highest tax bracket, and if you’re planning on dying after 2025, that will be at least 39.6%. The US government is hurting for tax revenue and they are willing to force your children to pay taxes on their inheritance that they would otherwise be able to stretch out over their lifetime. There is a good chance that they will only be able to keep half of it.  Ask yourself, does it make sense to have large amounts of money in your IRAs, having your spouse be forced to potentially pay taxes at double the rate, or for your children to pay taxes on that money over a ten-year period?  If you have lots of money in your taxable bucket, that may be a different story. If you can shift your taxable money over to tax free, that money can grow more productively, particularly in life insurance.  As we slip further into insolvency as a country, the US is going to put all options on the table in order to garner more revenue.  If you have a lot of money, the IRS is going to get their money one way or another. The question is, if you’re not going to pay that tax then who is going to pay?

The Power of Zero paradigm changes a bit when you have a pension. The best case scenario in terms of tax rates that you are going to experience is likely to be while you’re working. Let’s say we have two 60-year-olds that want to retire in 5 years. They have $500,000 in their IRA’s and 401(k)’s, and one of the spouses has a pension of $5,000/month. They are currently in the 22% tax bracket. If you have a $5,000 pension, that is construed as provisional income by the IRS. This means that up to 85% of this couple’s social security becomes taxable. When they couple the pension and social security together they are looking at filling up the 10% tax bracket and most of the 12%. Any dollar that the example couple takes out after retirement is going to flow into their taxable cylinder and they will pay taxes at the 22% tax rate or in the future the 25-28% tax bracket. We have a situation where if the couple wants to take money out of their IRA, the best case scenario is that they will be able to keep 78% of their money, and that doesn’t count state taxes. Where the opportunity lies when someone has a pension, is we can make the case that since they will be in the 22% tax bracket in retirement, they might as well be converting and maxing out that tax bracket until they are 65. We want to drain those IRA’s and 401(k)’s before they reach retirement so the money will come out tax-free. We worry about the things we can control, not the things we can’t, and we can’t control the fact that their pension and social security will be taxable but they can control the rate at which they get taxed on all their other assets. If they only convert $70,000 per year to maximize the 22% tax bracket, they won’t get all the shifting done in the next 5 years. That means they will have to pay higher taxes on the balance. They really need to get the money out before tax rates go up for good in 2026 and converting up to the top of the 22% tax bracket isn’t going to cut it. For only 2% more, they can convert an extra $150,000 per year which is a great deal (comparatively). Even if they pay an additional 2%, that will still be lower than the 25% tax bracket that the 22% bracket will be after 2026. If you are already in the 22% tax bracket, and that is most people, and you have a pension that will likely cause your social security to be taxed, you’re in a situation where there is no real reason not to max out the 22% tax bracket and probably the 24% as well. Every year that goes by where you fail to take advantage of the current 22% tax bracket is a year where you will be paying at least 25%. The real concern is when the US has a sovereign debt crisis, which is where countries will no longer loan us money and we can no longer print money to escape the issue. Social security and Medicare are pegged to inflation so printing money won’t be a solution, the only viable option will be to raise taxes. If taxes raise dramatically over the next decade, we’ll look back at the current time as an opportunity of historic proportions. Any sort of residual income will be taxed the same way and could cause up to 85% of your social security to become taxed. The bottom line is to take a look at what your tax bracket is today and what the best case scenario is going to be once your pension and social security fill up the first two tax brackets. You’ll see that not a year should go by where you are not taking advantage of these historically low tax rates. Your tax rates are going to double no matter what. When a spouse dies the cost of unlocking dollars from your taxable accounts doubles. If you’re thinking that you can just live off of your pension and social security and leave everything in your IRA, there is legislation being considered right now that may limit or greatly affect that plan. If you have an IRA, you should really shift those dollars to tax-free with a Roth Conversion or a LIRP. When we cut taxes, we did just the opposite of what economists said to do. Instead of cutting costs and raising taxes, we cut taxes and raised costs. Mainstream media outlets are starting to acknowledge that we have a debt problem and we’ll need to address it eventually. If you have a pension, make sure you assess what your tax bracket is today and recognize that taxes now are lower than they will be in the future. The highest marginal tax rate in 1960 was 89% and the poorest among us were paying 23%. We haven’t seen these tax rates in a long time but they are being talked about, experts across the country are making the case that we are at a crisis point. Weigh the evidence and decide if tax rates down the road will be higher. Every year that goes by is a year beyond 2026 where you will be paying the highest tax rates you’re going to see in your lifetime.

Let’s say we’ve got two 60 year olds that want to retire at the age of 65. They’ve got $300,000 in their taxable bucket, $700,000 in their tax deferred bucket between their IRA’s and 401(k)’s, and nothing in the tax free bucket. The first step to getting into the Power of Zero paradigm is being convinced that tax rates in the future are going to be dramatically higher than they are today. The second step is that given that tax rates are going to be higher in the future than they are today, realize that there is a perfect amount of money to have in your taxable and tax deferred buckets. Given the starting point, these two people have way too much in their taxable bucket, and they should be systematically shifting that money to tax free over the next seven years. They can do that through the Roth IRA, the LIRP, and they can also pay taxes on the shift from tax deferred to tax free out of the taxable bucket. They know they need the balance in the tax deferred bucket to be low enough so that when the IRS forces them to start taking money out, the RMD’s are equal to or less than their standard deduction and that avoids their social security to be taxed. Assuming they don’t have a pension or any form of additional income, the ideal amount of money in the tax deferred bucket is around $300,000. It’s okay to leave some money in your tax deferred bucket. You want your balance to be low enough that your social security doesn’t get taxed, but you also want to be able to take advantage of your standard deduction. In order to shrink it down to the optimal number, the example couple would need to shift about $92,000 each year. Remember you want to stay in a tax bracket each year that doesn’t give you heartburn. Lucky for these people, they can shift an additional $150,000 each year for only an extra 2% tax, which they can pay out of their taxable bucket. Keeping the taxable bucket around $50,000 will go a long way towards insulating yourself from tax rate risk. The LIRP is meant to mitigate one of the biggest risks for people over the age of 60, namely a long term care event. Without a plan for long term care, they could potentially burn through their entire portfolio. What they should do is get a death benefit that’s impactful. That means a fully funded LIRP which looks like around $35,000 each year. With $35,000 going to the LIRP, $55,000 should be going to their Roth Conversions. If they have any money leftover in their taxable bucket, they should probably put that money into their Roth IRA’s because they should have as many streams of tax free income as possible by the time they retire. Tax free streams of income include Roth IRA’s, LIRP’s, and Roth Conversions. With all those combined, they could get to the zero percent tax bracket while also getting their social security tax free.

The five key takeaways of The Power of Zero message have evolved considerably, especially since the recent Trump tax cuts. The first takeaway is that tax rates in the future are likely to be dramatically higher than they are today. Politicians are extremely averse to cutting spending in any way because cutting the programs that are going to consume the most in terms of resources like Medicare and Medicaid is the third rail of politics. We are at $22 trillion in debt and it will continue to grow because we are not able to even broach the subject of cutting spending. This means the only option at this point will be to double taxes, cut spending in half, or some combination of the two. Tom McClintock believes that if the US doesn’t change course in a serious way, it will end up like Venezuela in 8 years. The only way to insulate yourself from the effect of higher taxes is to get to the zero percent tax bracket. Worry about the things you can control, not the things you can’t. If you have money in an IRA and 401(k), why not shift all that money to tax free at the lowest tax brackets you are likely to experience in your lifetime? It is nearly impossible to get to the zero percent tax bracket by relying on just one stream of tax free income. Putting your eggs all in one basket is terrible advice, you need multiple streams of income to get the zero percent tax bracket. Each stream of income strategy has its own advantages that others don’t. Leaving a small amount of money in your IRA in retirement can lead you to the holy grail of financial planning. You get a deduction on the front end and your required minimum distributions on that account get offset by your standard deduction. When it is low enough, it won’t cause your social security to be taxed.  Social security can be tax free, it functions like an annuity in that the longer you live the greater the investment you get out of it. It also functions as a volatility shield by providing you money to rely on for your lifestyle, instead of drawing from your portfolio in down years.  The Life Insurance Retirement Plan gives you safe and productive growth, is tax free, and it can also give you a death benefit that can solve your long term care insurance problem.  As of January 1st, 2018, tax rates went on sale. Given the Trump tax cuts and the sunset provisions on those cuts we now know the exact day that tax rates will go up. People are afraid to do things like Roth conversions because of the possibility of tax rates going down in the future, but at this point taxes going up is all but guaranteed by 2026.  You want to pay as little tax as possible and stretch out the tax liability over the next seven years, but you also want to do it quickly enough to get all the heavy lifting done before tax rates go up. [ Whether you did your financial planning wrong is up to you. If you treat the next seven years perfectly you have a chance to make it right. You now have the next seven years to move your money from tax deferred to tax free and wring the most out of your retirement dollars.