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?
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