The Power Of Zero Show

There are a number of ways to get money out of an IRA before you are 59 and a half years old. One is a Roth Conversion, but the problem with that is you have to pay tax and potentially a penalty. The only other way is something called a 72(t). The 72(t) basically means separate equal periodic payments. What this means is that you can take money out of your IRA before your 59 and a half years old as long as you do it in separate equal yearly distributions that last for at least five years, or until you are 59 and a half, whichever is longer. With the 72(t) you can take out about 5%, but that number ebbs and flows with interest rates. The IRS gives you three different income options when it comes to the 72(t). The first two options are fairly similar, amortization and annuitization. The third option is the required minimum distribution method. The RMD method is different because it's recalculated every year, and is designed to get bigger each year. With the first two methods, you are locking in to a level payment. If you don't keep the payment for a minimum of five years, you are going to pay a penalty. The only way to waive the penalty is to die or become disabled, but you do have a chance to change the method once if you see an issue in the future. The number one reason to do a 72(t) is to fund an LIRP and there is no other money anywhere with which to do so. Number two is you can't do a Roth Conversion because you have no money in your taxable bucket. Number three is to stymie the growth of an IRA prior to the 59 and a half year mark. Only one of ten will be a candidate for the 72(t), but for those who can take advantage of it, it can be a powerful tool to get money flowing to your tax-free bucket. Beyond funding an LIRP, you can spend the money however you want. David recommends putting the money into a tax free account. The point is to start growing dollars in the tax free bucket. Letting the tax deferred bucket grow in an uncontrolled way complicates your tax picture down the road, especially in a rising tax rate environment. You can be too young to use a 72(t) since you are committing to a lengthy time and your situation may change. There are also older ages where the 72(t) doesn't make sense. The closer to 59 and a half years old you are, you may as well wait instead of getting locked in and risking a penalty. The 72(t) should only really be used when there are no other options to fund the Roth Conversion or the LIRP, and the ages between 50 and 57 is the sweet spot for it. It's a great concept that allows you to start getting money into the tax free bucket, but it should only really be used in prescribed scenarios.

There are three critical mistakes that most people make when preparing for retirement that really should be resolved beforehand. The first mistake is to assume that you will be in a lower tax bracket in your retirement years. This has been pushed by more than a few financial gurus online that tell people to get a deduction during their working years by putting money in 401(k)'s and IRA's. This is likely a miscalculation on the part of many people getting ready for retirement. The country is $22 trillion in debt with $1 trillion deficits every year, plus 10,000 Baby Boomers retiring every day. In 2026, Medicare goes broke. In 2032, Social Security goes broke. The question is, how do we account for the massive gaps in these programs? To suggest that we will be in lower tax brackets ten years from now is to be completely ignorant of the math involved. Some experts have even claimed that we will just print and inflate our way out of the problem. The trouble is these programs are pegged to inflation. We can't borrow or print our way out, we aren't going to reduce expenses, so the only likely solution at this point is raising taxes. The first mistake is listening to the wisdom of yesterday without considering that times have changed, but if we look at the fiscal landscape of the country, it's hard to arrive at any other conclusion. The second huge mistake is having IRA and 401(k) balances that are so big in retirement that required minimum distributions cause your Social Security to be taxed. Most people don't realize the impact of Social Security taxation. If you have more than $44,000 in provisional income as a married couple, then up to 85% of your Social Security can become taxable at your highest marginal tax rate. Most people start taking more money out of the retirement accounts to make up for the shortfall which can have serious long term impacts. People who have their Social Security taxed will, on average, run out of money 5 to 7 years faster than people who don't get taxed. The way you avoid this is by shifting your money to tax free accounts and pay the tax now before you retire. The third mistake is not taking advantage of Roth IRA's and Roth 401(k)'s while you still can. Every year that goes by that you fail to take advantage of these accounts is an opportunity you will never get back. There are opportunity costs associated with not contributing money to these kinds of accounts. If you have a lot of money sitting in your taxable bucket, there are only so many ways to get the money out of there, like paying taxes on Roth conversions or a life insurance retirement plan. Roth IRA's have great liquidity, so every year that goes by that you don't fund these accounts is a mistake. The cost of admission to a tax-free account is paying a tax, and taxes are currently in a period where they are historically low. You can't go back in time and recuperate the lost years where you didn't contribute to your tax-free accounts. More people should have a balance between their buckets, also known as income tax diversification. By being aware of the three mistakes, you will be less likely of needing to make massive expensive shifts to be tax free later in life.

Harlon Accola is the National Reverse Mortgage Director for Fairway Independent Mortgage Corporation, and reverse mortgages are all he's done for the last sixteen years. More recently he's been training other professionals in how reverse mortgages mesh with overall financial planning. It is true that if you do a reverse mortgage you will lose equity, but it's not about losing equity, it's about spending equity. A reverse mortgage is simply a way to get your money back out in a tax free way that you can use to fund your retirement. You lose equity but you will gain cash. You won't have to pull that money out of somewhere else, which will allow your investments to continue growing. Everything is expensive if we don't understand the value. Reverse mortgages are more expensive than most other mortgages, but that's because of the protection you get from the mortgage insurance. Everything costs something, no matter where you take out the money you will pay to access it. The question is "does the value justify the cost?" A reverse mortgage can actually be better for inheritors than other options. If someone gets a reverse mortgage at 62 instead of waiting, they will have more cash flow during their lifetime, they will pay less taxes, they will have a higher net worth, and a bigger legacy to pass on to their children. What decreases the inheritance to children is long life and spending down assets, not reverse mortgages. By putting that money into a more effective investment, your children will end up better off. The alternative to living off your home equity during retirement is spending down all your other assets. By using your equity, it gives your investments more time to grow at higher interest rates. There are a number of new rules that have been put in place to make sure that people don't end up on the street after taking out a reverse mortgage. The only way to lose your house with a reverse mortgage is if you don't pay the taxes or stop living in it. Most fears around reverse mortgages are unfounded. Banks don't want your house. If you die early, your heirs get whatever equity is left. The bank doesn't become the owner of the home. If the reverse mortgage goes upside down by the time you die, your heirs won't owe any extra money. If it doesn't go upside, your heirs get the difference. Reverse mortgages are truly tax free, because borrowed money is not taxable. Because you are not selling your house you will not pay tax. Reverse mortgages can not cause a taxation issue, it can only be a tax deduction. A reverse mortgage is a source of money that isn't taxable so it makes Roth conversions much easier to calculate and more useful. The majority of Harlon's clients are mainly affluent and use reverse mortgages to optimize their retirement investments and decrease their taxes. Many investment advisors say that you can't use a reverse mortgage to fund an investment product, but that's not what's happening here. It's about using cash flow properly to replace money that is otherwise going to come out of higher cost and taxable accounts. There is $7.1 trillion sitting in people's houses. If by working with advisors, we can create liquidity. We can change the way retirement is done in this country. Everyone is skeptical about reverse mortgages at first, but you should run the numbers to see if your skepticism is valid.

Today, we continue last week's discussion of 15 Things You Should Know about the Roth IRA, with Part 2. You can not take a required minimum distribution from an IRA and turn it into a conversion, you have to deposit it somewhere else. The ideal scenario is to preemptively convert all your IRA's to Roth IRA's before you would want to. Roth conversions have to be done before December 31 but that makes it a real challenge to know what your modified adjusted gross income will be for the year by that time of the year. With traditional Roth IRA's, you have the ability to make up your mind in terms of contributions until April 15th of the following year. You can't recharacterize your Roth IRA anymore. You now have to work with the hand the market deals you in any given year. Roth IRA's don't have any required minimum distributions during your lifetime and if you die that still applies, but if you die and the account goes to a non-spouse beneficiary they do have to take distributions. This may change when the SECURE Retirement Act gets signed into law at some point in 2019. Roth IRA's have a 5 year rule. Whatever money you contribute to your Roth IRA, you can take out and return as long as you put it back in within 60 days. The 5-year rule says that you cannot touch the growth on your account until 5 years have passed or you are 59½ years old. Roth conversions also have a 5 year rule. If you convert $100,000, you can't touch that money for a minimum of 5 years without suffering a penalty. Technically this rule is also a way to take money out your account penalty free if you are younger than 59½ years old as long as you wait 5 years. The rule no longer applies once you are over the age of 59½ years old.

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.