Micheal Coleman texted a glowing testimonial to David about his latest book, “The Volatility Shield.”
We often talk about why your taxes could double in an effort to keep the country solvent because of the vast unfunded obligations like Social Security, Medicare, and Medicaid. However, there is another scenario where your tax rates can double that has nothing to do with those factors.
David relates the story of a limousine driver that he met that was quite proud of his financial planning. He had a pension and a 401(k) with a million dollars in it, and felt like he had everything set up just right.
The first question to ask is, “what tax bracket are you in?” It’s important to figure out where you are in the tax cylinder, because you want to know the cost of implementing any sort of asset shifting recommendations.
The driver was in the 15% tax bracket at the time, but David pointed out that if he or his spouse died that would be more like the 25% tax bracket.
In terms of advice, if all the driver did was shift the maximum allowable amount within the 15% tax bracket into a Roth IRA, he would be able to protect $35,000 per year as long as both spouses were alive.
If there is a possibility that you or your spouse will pass away in the next 20 years, your tax rate is going to double no matter what. The Power of Zero principles can help protect you from more than just the risks associated with the country becoming insolvent.
When you file as a single taxpayer, you hit each subsequent tax bracket twice as soon. If you are living on the same amount of money as you were when you were married, you could find yourself with a marginal tax rate that has doubled.
Systemically repositioning money from tax deferred to tax free allows you to avoid this scenario, and pay tax rates that are still historically low.
It not only allows you to take out your money down the road tax free, if it goes to your heirs they also get to receive it tax free, at a time where tax rates will likely be much higher and they can least afford to pay them.
Shifting money to tax free doesn’t just benefit you, it can also benefit the people that will spend your money after your death. You don’t want to scrimp and save your whole life only to give up to 50% of your money to the IRS.
If you’re in the slow-go years or the no-go years you’re likely in a low tax bracket. So, it makes sense to figure out what your current tax bracket is right now, and compare that to what your children would pay if they were to inherit your tax deferred assets.
If you’re in the 22% tax bracket it makes sense to look at what the 24% tax bracket can do for you in terms of your ability to shift money to tax free.
Even if tax rates don’t double to keep the country solvent, they can still double for you. If that happens, it will be too late to do the Roth Conversion because the conversion will be done at the doubled tax rate.
We are at historically low tax rates, especially for married people, so take advantage of them while you still can.