Once you get past December 31 of 2019 you will only have six years left to reposition dollars from tax-deferred to tax-free before tax rates go up for good. Every year that goes by your timeline gets shorter. The question that David gets all the time is what is going to happen once 2026 hits and will the Power of Zero paradigm still exist?
The Power of Zero was written in 2013 and plenty of people between 2014 and 2017 were taking advantage of the Power of Zero strategy before they even knew there was going to be a tax sale. Even back then those tax rates were still considered good deals.
Just because the tax sale ends in 2025, that doesn’t mean things are changing that much. Tax rates will still be low historically and especially so given where tax rates are likely to go in the next decade or so.
The main thrust of the Power of Zero message is that in a rising tax rate environment there is an ideal amount of money to have in your taxable and tax-deferred buckets. So long as you are paying taxes that are lower today than they will be in the future the strategy still applies.
The difference between the low tax rate and the high tax rate is a benefit that accrues to us and helps us wring more efficiency out of our tax dollars.
The question you need to ask yourself is “are we in a rising tax rate environment?” The Power of Zero vision is always in effect in a rising tax rate environment, the only scenario where it doesn’t make sense is in an environment where taxes will be lower in the future than they are today.
What if you only have two years left? If you’re going to shift all your money in two years, you have to be very cognizant of what tax bracket you will bump into. In many situations, it will make more sense to pay slightly higher taxes by stretching out your plan beyond 2026. There are worse things than paying a few extra percentage points in taxes.
Even while taxes are on sale, you don’t want to rise into a tax bracket that you wouldn’t otherwise have to.
If you average the tax rates during the tax sale with those few years you may have to pay beyond 2026, you are still probably coming out ahead than if you had shifted all your money prior to 2018.
It’s not the end of the world when we get to 2026. The Power of Zero paradigm will still be in full force. Simply put, in a rising tax rate environment you are always going to be better off paying taxes at the lower rate.
Don’t panic if you only have 5 years to get all your shifting done. What should worry you is waiting until 2027 and beyond to start the process. All tax rates have to do in the future is to rise by 1% a year for the Power of Zero math to make sense.