The Power Of Zero Show

The taxable bucket contains investments that you get to pay a tax on. Things like savings accounts, money markets, stocks, and bonds. You know your investment is taxable when you receive a 1099 from the IRS. These are not the most efficient investments in the world. You can have as much money as you want in your taxable bucket, as long as you recognize that there is a financial consequence for doing so. It may not seem like a big deal, but if you take those inefficiencies and amortize them out to a lifetime it can cost you several hundred thousand dollars. The ideal balance in your taxable bucket will depend on your marital status, whether both spouses working, or if you're a business owner. A good rule of thumb is if you have at least two steady incomes in your family, you should have at least three months worth of barebones expenses set aside. If you have one income earner or are a business owner, you should have around six months worth of expenses set aside. Your taxable bucket is where your least valuable dollars go. Take a look at the contribution limits that the IRS defines for certain accounts, the more limited the contribution amount the better that account probably is in terms of taxes. You have to be contributing to your taxable bucket in a very defined way and limit it as much as possible. If your taxable bucket grows every year, so does your 1099. Your taxable bucket has a purpose, primarily to meet your needs in an emergency. There are taxes in life that we pay, that we are not required to pay. Provisional income is the income that the IRS keeps track of to determine if they are going to tax your Social Security. You can lose up to one-third of your social security if you have too much money in your taxable bucket. There are a number of accounts and strategies that you can use to keep as much money out of your taxable bucket as possible. Don't let a year go by where you are not taking advantage of all of the tax-free investments that the IRS makes available to you.

There is a massive disconnect between what people think the future of tax rates will look like and what they are doing to prepare for it. If you believe that tax rates will be 1% higher than they are today, you should have as much money as you can in tax-free vehicles like a Roth IRA. The national debt is currently around $21 trillion dollars. A lot of people think that is not necessarily a big deal since that is only 106% of GDP but that is only a piece of the overall picture. If we were to run our accounting like every other country in the world, we would actually have $200 trillion dollars in debt due to all the unfunded liabilities. We've made a huge number of promises that we can't afford to keep. The reason the media hasn't made a big deal about the debt is the cost of servicing the debt has been close to zero for the last 15 years. When interest rates start to creep up, the cost of renting the money could double or triple. The cost of servicing the debt would start to crowd out a lot of really important things in the national budget. The problem is not pork barrel spending, it's the obligations that we can't get out of by law. "This is crisis time." -George Schultz The real problem with our budget is Medicare, as Baby Boomers leave the workforce the cost of Medicare is going to crowd out everything else out of the budget. There is not a lot of upsides for politicians to try to change the existing law so as to modify what we are paying for Social Security or Medicare. People don't want to make tough decisions when it comes to either raising taxes or cutting spending. If we get to the point where we have a sovereign debt crisis, we risk financial insolvency. A lot of economists believe we won't get to that point until we see trillion dollar deficits, which we could see by the end of 2018. You can buy a trillion dollar bill from Zimbabwe and it only costs you $4, and that includes shipping and handling. Money is valuable because it is scarce, the more you print, the less valuable it becomes. As inflation goes up, the cost of basic services will go up as well. Reducing spending is known as the third rail of politics. If anyone brings it up, they will probably find themselves voted out of office. Every year that goes by where they fail to reduce spending, the fix will be more draconian and severe. The likelihood that taxes will go up is increasing every single year. You don't have to go very far back in history to find tax rates that were dramatically higher than they are today. Tax rates ebb and flow over time based on the needs of the government. There isn't any reason to expect that tax rates won't be higher in the future than they are today. When you take your money out at retirement, do you believe taxes will be higher or lower? If you believe it's going to be higher, then you should put as much money as you can in tax-free vehicles.