“I don’t want to pay the taxes on my Roth Conversion” is the single greatest objection David sees every week.
David believes that whoever makes that argument is basically saying that they don’t want to pre-emptively pay a tax before the IRS absolutely requires it of them and that they think their tax rate down the road will be lower than it is today. He sees the latter point as the greater concern.
For David, if you’re in the 22% or 24% tax brackets – meaning that your taxable income is between $83,550 and $340,100 – but are pushing the payment of taxes on your Roth Conversion down the road, you’re actually missing out on a good deal. Ten years from now, he argues, when the country’s tax rates will have risen dramatically, you’re going to end up realizing that you missed out on a deal of historic proportions.
David sees not being convinced that tax rates in the future are likely going to be higher than they are today and being reluctant to pay the cost of admission to the tax-free bucket as the greatest roadblock in getting you to the 0% tax bracket in retirement.
In case you feel as if you’re in the situation described above, David suggests educating yourself on what independent, third-party, experts have to say about the future of tax rates – and he recommends reading chapter 1 of his book Power of Zero and watching the documentary The Power of Zero: The Tax Train Is Coming.
David shares that, historically, tax rates have been substantially higher than they are today. Marginal tax rates post WWII were 94%, and marginal tax rates in the ‘70s were 70%. The highest marginal rate today is 37%. These rates have nowhere to go but up.
All the experts that were interviewed for The Power of Zero documentary said the same thing: if we don’t change course immediately, ten years from now tax rates will have to rise dramatically or we’ll go broke as a country. Some of them even said that tax rates will have to double or we’ll go broke as a nation.
David touches upon quotes from a MarketWatch article of his that featured insights from Ray Dalio, Leon Cooperman, Ed Slott, Larry Kotlikoff, and Larry Swedroe regarding the future of tax rates in the next ten years.
David brings up a key question you should ask yourself: wouldn’t you rather pay taxes today, on your terms, than postpone the payment of those taxes until the IRS forces you to pay them on their terms?
Mentioned in this episode:
David McKnight vs Financial Guru (Part 1): powerofzero.com/blog/Power-of-Zero-vs-White-Coat-Investor-David-McKnight-Response
David McKnight vs Financial Guru (Part 2): powerofzero.com/blog/the-white-coat-investor-responds-and-i-rebut-his-response
David McKnight vs Financial Guru (Part 3): powerofzero.com/blog/power-of-zero-vs-white-coat-investor-final-response
The Power of Zero: The Tax Train Is Coming–TheTaxTrain.com
MarketWatch Article: marketwatch.com/story/heres-a-way-to-make-your-retirement-savings-last-longer-2020-12-08
POZ episode 181: Should High Income Earners Do Roth Conversions–podcasts.apple.com/us/podcast/should-high-income-earners-do-roth-conversions/id1441026169?i=1000558116209
David’s books: Power of Zero, Look Before Your LIRP, The Volatility Shield, Tax-Free Income for Life and The Infinity Code
PowerOfZero.com (free video series)
@mcknightandco on Twitter
@davidcmcknight on Instagram
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