Part 2, Jonathan Krueger from Living a Richer Life By Design, interviews David McKnight

the power of zero

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.

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