160 episodes

Tax rates 10 years from now are likely to be much higher than they are today. Is your retirement plan ready? Learn how to avoid the coming tax freight train and maximize your retirement dollars.

The Power Of Zero Show David McKnight

    • Business
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Tax rates 10 years from now are likely to be much higher than they are today. Is your retirement plan ready? Learn how to avoid the coming tax freight train and maximize your retirement dollars.

    My Upcoming Book, Legislative Update and Thoughts on Hyperinflation

    My Upcoming Book, Legislative Update and Thoughts on Hyperinflation

    The situation with the Biden infrastructure plan continues to evolve. Senators Joe Manchin and Krysten Sinema have continued to be obstacles in the Democrats' way from getting the bill passed. 
    The Democrat caucus has been in disarray and seems to be pulling in different directions. Biden was hoping the bill would pass by having everyone vote before the legislation was written prior to him landing in Rome. Right now, it looks like things are dead in the water including raising tax rates on the rich.
    The big question is whether the Trump tax code will remain in place until 2026. Joe Biden has expressed his desire to raise taxes on the rich, and the easiest way for him to do that is to simply let them expire.
    For most Americans, this means that if you want to shift your money from tax-deferred to tax-free, you have just five years left. The fewer years you have to shift your money, the more likely you are to rise into a tax bracket that is going to give you heartburn.
    Whatever happens in the next week is going to determine how people plan for retirement in a significant way and is going to determine the legacy of the Joe Biden presidency.
    Will Congress simply change the laws regarding Roth accounts? Not likely. To do so at this point would cause political and economic chaos. The Roth IRA is also one of the accounts that both the federal government and the average American likes. If anything, the government will try to make the Roth IRA even more attractive in order to raise more tax revenue now.
    David is currently writing a new novel based on the very real threat of the Modern Monetary Theory to America. There is a massive fiscal gap in the US of $239 trillion dollars which is going to have to be dealt with eventually, but the Modern Monetary Theory has been saying the debt is nothing to worry about.
    Modern Monetary Theory is becoming more in vogue recently with many politicians advocating it as a solution to our economic woes.
    Inflation is already here. We feel it at the grocery store and in our everyday expenses, but we are just at the tip of the iceberg.
    There is no question that inflation is coming, but whenever MMT proponents are asked about it, it’s never their fault. We have been practicing MMT for decades at this point, and eventually we will get to the point where interest rates begin to rise toward historical averages. When that happens the interest on the debt will consume the federal budget.
    Social Security, Medicare, and MediCaid are tied by law to inflation, so when money is printed to pay for those programs their cost goes up commensurately. It’s not possible to print enough money to solve the issue.
    Longevity risk is a major concern for all retirees, and one of the ways to mitigate it is with the 4% Rule, or what some economists now call the 3% Rule. The trouble is the rule is a very expensive way to mitigate the risk. The alternative is with a guaranteed income annuity. 
    The financial industry has accepted the reality of longevity risk and the benefits of annuities in mitigating that risk, but since the standard is to implement that annuity in the tax-deferred bucket it comes with a number of drawbacks and other risks.
    Some companies allow for piecemeal Roth conversions which allow you to convert that annuity money to tax-free.
    For people who say annuities are not for them, they aren’t going to like Social Security or their company pension plan since they operate exactly the same way.
    The Power of Zero paradigm basically says that tax rates are going to rise dramatically in the near future, and when you have the majority of your money in tax-deferred accounts like 401(k)s and IRAs, you are at risk. David advocates for five or more streams of tax-free income including the Roth IRA, Roth 401(k), Roth conversions, and LIRP.
    The LIRP stands out because of its additional features of mitigating long-term care and coming with a death benefit.
    Very few Americans will be exposed to the estate

    • 47 min
    Updated Tax Thresholds for 2022 AND Is the Biden Tax Plan Really Cost Neutral?

    Updated Tax Thresholds for 2022 AND Is the Biden Tax Plan Really Cost Neutral?

    Joe Biden has talked about how his tax plan is cost neutral, where the increases in taxes on the wealthiest Americans will offset the costs. Maya MacGuineas recently took a look at the numbers to find out if that’s true.
    The Build Back Better Act is set to cost $2.1 trillion as it’s currently written. It relies on a number of sunsets and expirations to keep the costs down. If the plan’s temporary policies were made permanent, the costs would increase by an additional $2.2 trillion.
    When the federal government is trying to make a bill seem cost neutral, they often build expiry dates into the legislation, knowing full well that Americans will get hooked on those programs and then demand they be renewed. This makes the cost of the program appear lower and much more palatable on the front end.
    The Build Back Better Act has several such gimmicks built into it including extending the child tax increase, the earned income tax credit, and setting universal Pre-K and childcare to expire after six years. These are things that are likely to be around for the long term.
    The most expensive provision would cost roughly $1 trillion to make permanent. Universal Pre-K and childcare subsidies would cost over $400 billion a year when combined if extended beyond their expiration dates.
    As written, the Build Back Better Act will increase the deficit by $800 billion over the first five years and then taper off from there for a net additional cost of $2.2 trillion.
    If the legislation were made permanent without additional taxation, it would add nearly $1.5 trillion to the deficit over five years and increase the total debt by $3 trillion by 2031.
    The Build Back Better Act relies on short-term policies and arbitrary expiration dates to lower the cost. This allows the government to present the bill as cost neutral, although any extensions will have to be funded by debt.
    History serves as a model, and it’s fairly likely that those short-term programs will become permanent in time.
    The tax rules have recently been updated for 2022. Because of higher than usual inflation in 2021, the index for inflation has increased as well.
    The standard deduction has modestly increased from $25,100 to $25,900 for married couples.
    The personal exemption is not coming back until 2026. Under the current law, the standard deduction will be reduced when the personal exemption returns and will end up with a net neutral effect.
    Capital gains tax rates remain the same, but the tax brackets are changing.
    The federal state tax exemption for decedents dying in 2022 will increase to $12.06 million per person. The gift tax exclusion jumps from $15,000 in 2021 to $16,000 in 2022.
    The Roth IRA is not changing to adjust for inflation because that would require an act of congress.
    401(k) contribution limits are being adjusted alongside Roth 401(k) and 403(b) plans.
    Roth income limits will go up slightly in 2022 from $204,000 to $214,000. This is something that should definitely be changed because the cost of living is not the same all over the country.
    There has been no change to the provisional income thresholds. If inflation continues to go up and Social Security is increased to keep up, there are going to be more people that bump into Social Security taxation.

    • 18 min
    How to Access Your 401(k) Prior to 59 1/2 without Penalty

    How to Access Your 401(k) Prior to 59 1/2 without Penalty

    There is a little-known part of the IRS tax code that allows you to access your 401(k) or 403(b) prior to 59 and a half without penalty.
    Traditionally, the penalty is 10%, but the Rule of 55 gives you access without paying a penalty, but it comes with certain requirements.
    If you leave your job in the calendar year you turn 55 or older for any reason and your employer has stipulated that you have the ability to tap into your plan, you can do so without penalty. Some plans may require you to withdraw your entire balance as one lump sum, which would most certainly be a bad deal.
    To maximize the Rule of 55, there are a number of roll-over strategies you can use. For example, if you have an old 401(k) or IRA, you can roll those balances into your employer’s plans, and then when you separate you will have unfettered access to the total amount between age 55 and 59 and a half.
    If you have specific circumstances or know that you’ll have heavy cash flow needs between those ages, this is a solid, penalty-free option.
    You have to get all the shifting done before you leave your employer. You won’t be able to roll over a balance after you are no longer employed.
    There are some caveats. You can only withdraw funds from your most recent employer, and you can’t make penalty-free withdrawals from your IRA. The Rule of 55 is very specific and only applies to narrow circumstances.
    People are retiring at younger and younger ages, and if that’s the case for you in that period between age 55 and 59 and a half, the Rule of 55 is a great option. You will want to apply Power of Zero principles during those years because if you don’t you may bump into a higher tax bracket than you expect or accidentally suffer a 10% penalty.
    Another reason you may want to take money out of your 401(k) using the Rule of 55 is to take advantage of historically low taxes. You can use the money to fund your lifestyle as well as your Roth IRAs and LIRPs. 
    A 72T is another viable option for some people, but it comes with artificially low limits that may be an obstacle. The 72T works for a lot of people, it just doesn’t work for everybody, particularly those that want to retire early.

    • 14 min
    Can a Billionaire's Tax Save Joe Biden's Signature Legislation

    Can a Billionaire's Tax Save Joe Biden's Signature Legislation

    The Joe Biden legislature is currently dead in the water. Congress people are looking for ways to pay for the package, but even if they could there may not be a package to pay for.
    Every Senator wields considerable power and a couple in particular have been vocal opponents of the proposed bill. Joe Manchin and Krysten Sinema have voiced concerns about the package and the price tag.
    Other members of the Democrat party have lambasted Joe Manchin on social media and on the floor, and he has not taken the criticism lightly. He’s gone from proposing a $1.5 trillion dollar limit to $0, and Krysten Sinema has made it clear that she’s not interested in any sort of tax increases at all.
    Congress has now turned its attention to a different sort of tax. They’ve proposed a wealth tax, also described as taxing the unrealized capital gains on the liquid assets of anybody who has $1 billion or more in assets or anyone reporting more than $100 million in income for three consecutive years.
    This would affect only the 700 richest people in the country, and will generate $200 billion in revenue over the next decade.
    The reasoning is that raising the tax rate isn’t going to directly affect the highest earners because so much of their net worth is tied up in the value of their stock ownership. 
    Democrats are not calling this a wealth tax because it’s not being levied against the entire net wealth of a wealthy person. Elizabeth Warren proposed a wealth tax in her presidential run and it is considered to have sunk her campaign.
    Jeff Bezos doesn’t liquidate his stock to fund his lifestyle. He borrows money and uses his stock holdings as collateral. This allows him to fund his lifestyle while still maintaining a controlling interest in Amazon.
    Democrats have asked Krysten Sinema to weigh in on the proposal, but she’s not likely to vote for it since she’s opposed to similar measures already being proposed. This would leave the Democrats below the threshold of a simple majority.
    Critics of the plan say that it will force billionaires out of the stock market and into more opaque markets like art and real estate.
    The real issue is that, even if passed, this tax only raises $200 billion in revenue. Even if the Democrats managed to pass the bill, there is still no clear plan to pay for it.
    The real question with this package hanging from a thread is what will happen to individual tax rates? Joe Biden’s proposed tax increases are tied to the bill so right now we have a choice. 
    We can either assume the tax rates will expire in 2026 and this bill will not pass. The trouble with this is compressing the amount of shifting you need to do over five years and possibly bumping into a higher tax bracket along the way, only to realize after the fact that you had nine years all along.
    The reverse is also troublesome. You don’t want to plan for nine years when you only have five and end up in the scenario where you didn’t shift as much as you need to.
    Joe Biden wants to increase tax rates on the rich, but the only way for him to really accomplish that is by allowing the Trump tax cuts to expire in 2026. 
    The more time that passes that Joe Biden fails to push through this legislation, the less likely that anything is going to be adopted. Few Congress people want to have their name tied to a controversial piece of legislation leading up to midterms because that’s the kind of thing that will get you voted out of office.
    Mentioned in this Episode:
    With corporate tax off table, U.S. Democrats turn to billionaires to fund spending bill - reuters.com/world/us/with-corporate-tax-off-table-us-democrats-turn-billionaires-fund-spending-bill-2021-10-25/
    Secretary Yellen: How new billionaire tax would work [video] - edition.cnn.com/videos/politics/2021/10/24/yellen-on-billionaire-tax.cnn

    • 15 min
    The Importance of Multiple Streams of Tax-Free Income

    The Importance of Multiple Streams of Tax-Free Income

    David gets variations of one question pretty frequently whenever he gives one of his presentations, whether that’s in front of financial advisors or members of the general public.
    At the end of the workshop, there are five takeaways. The first is that tax rates are likely to be dramatically higher in the future than they are today. Mathematically speaking, we are past the point of no return.
    The second is that the only way to truly insulate yourself from the impact of higher taxes is to get to the zero percent tax bracket.
    The third is that it is nearly impossible to get to the zero percent tax bracket with only one stream of income. This is where most people stumble.
    Invariably at the end of the presentation, someone will come up and ask what the other streams of tax-free income are despite having just gone over six different streams during the presentation. People tend to fixate on the LIRP and forget about the rest.
    The LIRP is great, but it has a narrow focus and doesn’t do enough to generate a stream of tax-free income on its own.
    Typically, David recommends diversifying your tax-free streams of income because each one is unique and accomplishes different parts of the strategy.
    Getting to the zero percent tax bracket is like fitting pieces of a puzzle together. Only when you fit them all together does the zero percent tax bracket come into play for you.
    The first stream is the Roth IRA. If you’re younger than 50, you can contribute $6000. If you’re older than 50, you can contribute $7000. The thing that makes the Roth IRA unique besides being tax-free is that when you put money in, you can take money out right away. It’s the only tax-free stream of income with that feature.
    The Roth 401(k) is unique because it’s part of a company plan and they will often have inducements that go with it.
    The Secure Retirement Act 2.0 that is working its way through Congress will also allow you to direct that match to your tax-free bucket. This company match is free money and that’s something you should always take advantage of.
    The Roth conversion is unique because it can be the workhorse for your retirement planning. It allows you to convert as much as you want to tax-free because there are no limits at the moment. If you have a lot of money in your IRA ($10 million+), it probably makes sense to convert all of that money before tax rates go up next year.
    Required Minimum Distributions are interesting in that they come from your tax-deferred bucket. The idea is that the balance in your IRA is low enough that your RMDs at age 72 are equal to your standard deduction and don’t cause Social Security taxation. RMDs are the only strategy where you get a deduction on the front end, the money grows tax-deferred, and you can take it out tax-free, also known as the holy grail of financial planning.
    The LIRP has a lot of things going for it, but one thing that really stands out is the death benefit. Should you die prematurely, your heirs get a death benefit. With the right LIRP, you can also receive that death benefit in advance of your death for the purpose of paying for long-term care. This avoids the heartburn of paying for something you hope you never use.
    Social Security is the final stream of tax-free income. As long as your provisional income is below certain thresholds, it’s tax-free and functions a lot like an annuity. It can help you mitigate longevity risk, inflation, and sequence of return risk. The longer you live, the better it gets.
    The Power of Zero approach is built around having multiple streams of tax-free income. This is also how you know whether an advisor is following the true Power of Zero plan. Each stream of tax-free income is unique in its own right and contributes something to your retirement plan that none of the others can do. 

    • 21 min
    Is Biden's Tax Plan Going Up in Smoke?

    Is Biden's Tax Plan Going Up in Smoke?

    It looks like Joe Biden’s landmark legislation is running into some challenges in Congress.
    Joe Manchin, one of the most powerful men in Congress right now, has pushed back on the $3.5 trillion bill and counter-offered with a more narrow $1.5 trillion plan. Progressive Democrats in the house are saying that it’s too small to make their priorities a reality.
    Both sides of the aisle are pulling in opposite directions and don’t seem to be able to come to a compromise.
    Joe Biden is making tax reform a major aspect of the Human Infrastructure plan. The increase of tax rates on those making more than $400,000 per year are the means for paying for part of the plan.
    If the bill fails to pass, the current tax law expires in 2026. If it does pass, the Trump tax cuts will still be in effect for another 8 years. The time difference could be the determining factor in shifting your money to tax-free without bumping into a higher tax bracket.
    Joe Biden is on the clock. If he can’t get this bill passed relatively soon, he’s going to convey the impression that his party is in disarray and they aren’t going into the midterm elections in a unified way.
    Typically, the party in power needs to get their priorities done in the first two years. The stalemate in Congress runs the risk of pushing the legislation so far out into the future that nothing happens.
    The bill will end up somewhere between the two extremes. There are other Senators and Congress people saying that the $3.5 trillion is too small while others are saying $1.5 trillion is the maximum.
    Nancy Pelosi has recently abandoned the effort to tie the Infrastructure bill and Human Infrastructure bill together.
    The longer this bill takes to pass or fail, the more likely failure becomes as congresspeople won’t want their name attached to it. This means that every day that goes by where this bill doesn’t pass, the likelihood is that the current tax rates are going to expire in 2026.
    Mentioned in this Episode:
    A top House progressive says $1.5 trillion is not enough to pass social spending plan - npr.org/2021/10/03/1042862107/a-top-house-progressive-says-1-5-trillion-is-not-enough-to-pass-social-spending-?t=1633978400218&t=1634060208587

    • 11 min

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