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Recent episodes featuring David McKnight
What You Need to Know About Tax Changes in 2020 with David McKnight
The new year brings important changes to the IRS tax code along with various thresholds that we have to know about when it comes to Power of Zero planning. We have to be keenly aware of these thresholds because they can end up being landmines if we’re not doing things correctly. The new income threshold for the Roth IRA is $124,000 to $139,000 for a single person and $196,000 to $206,000 for a married couple. The good thing about the Roth IRA is you have until April 15th of the following year to figure out how much you are going to contribute. The Roth conversion is a little more difficult. You have to make the decision before you have all the information prior to Dec 31 and you can’t change it once it’s been done. 401(k)’s have changed quite a bit as well, with increased limits on contributions for both people younger and older than age 50. This applies to Roth 401(k)’s as well which is good because you should take advantage of anything with the word Roth in it. We’re marching into a financial apocalypse so it’s very important to take advantage of as many of these diversified tax-free streams of income as possible. The standard deduction has also increased, but in 2026 we will be reverting back to the tax code of 2017, so the net result is likely to be pretty much the same. Required minimum distributions have been pushed back by two years. This won’t really impact people who need the money as they would withdraw it either way. This can be advantageous for people who don’t need the money because they won’t be forced to realize the income in their IRA’s. However, they may be hit with higher tax rates as taxes increase in the future. The stretch IRA has been abolished. This means that your non-spouse beneficiaries will have to spend down your IRA’s and 401(k)’s in the ten years following your death. This is another reason to move your money to tax-free so that your inheritors won’t have to pay some of the highest tax rates at the apex of their earning years. You can now contribute to your IRA after age 70 and a half which you couldn’t before. Gift and estate tax exemption is now at $11.8 million per individual but there is a chance that these changes may not last if a different administration takes the Senate, Congress, and White House. These changes are largely good for people looking to implement the Power of Zero strategy but there are some questions for the IRS that can be very revealing. The fact that they haven’t adjusted the contribution limits of the Roth IRA to keep up with inflation should tell you that Roth IRA’s are good things. The ideal approach to tax-free retirement is to take advantage of all the tax-free streams of income that are available to you because they all have benefits and merits that are unique to each bucket. They are all pieces of the Power of Zero puzzle.
Is Our Country's Fiscal Condition Past the Point of No Return? with David McKnight
For a grim depiction, check out this article The Mathematical Certainty of U.S. Government Default by Ptolemy3 about the future of the US government’s debt situation. The US government reached the tipping point at least fifteen years ago where the only way out will be default. People who calculate debt for the US federal always do it incorrectly. The proper way to do it is to figure out the net present value of everything that we’ve promised over the years minus what we can actually afford to deliver. The US government currently only projects these numbers out for 75 years, if they went out beyond that timeline the situation get much worse. The fiscal gap is growing. The expenses are going up dramatically and will continue to do so for years while the cash flow remains relatively static based on current tax rates. The author begins by looking at US government positive cash flow. Any prediction that economic growth will rise dramatically over time is based on religious belief. There is no data that suggests that economic growth will increase more than 2% in our lifetimes short of an AI revolution. Some people are suggesting that we’ve hit a maturity on economic growth and are actually approaching a decline. The basic standard programs are not likely to change; once a government program gets established it’s incredibly hard to get rid of it. Looking at the current assets and liabilities and estimating what the future cash flows will be over the next 75 years paints a pretty dark picture. When broken down, the net present value of the future obligations for social insurance programs alone is $49 trillion. Core operations of the government are actually running in a surplus, but the situation gets really ugly when you get to the interest payments on the debt. The current payment is around $300 billion but interest rates are projected to increase to an average of 5.1% over time. This means we would have to have $110 trillion dollars in the bank account today earning Treasury rates to be able to deliver on just the debt. The Terminal Value, the number we would need to have in the 75th year to be able to bankroll the expenses of the federal government in perpetuity, is an astonishing $1.6 quadrillion. When you add all the numbers up the net present value of all our future obligations is around $239 trillion. To put that into perspective, our fiscal gap represents almost 70% of all the money in the world. We are deficit spending, basically using debt to pay our bills. As the debt increases, there will be a point where it starts to snowball and we won’t be able to afford the interest on the debt no matter how much we cut back on other programs, and we’ve already passed the point of no return on that number. When interest rates go up, the costs of servicing the debt will triple. If the government defaults on the debt it would likely plunge the world into a depression. The author considers what would happen if we continued on the current path. By 2038, the US government will be running an annual deficit of $3.3 trillion which will last for decades in the future. We would most likely default at this point since waiting until 2058 or later would only make the future default more devastating. Gokhale and Smetters published a paper titled “Is the United States Bankrupt?” It describes the solution to the problem that would involve an immediate and permanent doubling of personal and corporate income taxes, and/or an immediate and permanent two-thirds cut of all social security and Medicare benefits. The author comes to very similar conclusions. When using the government’s numbers from their own financial reports, he ran into problems trying to reconcile their math. It looks like the government is deliberately trying to hide large numbers from the calculations including government employee benefits and Medicaid. Even using the government’s own numbers, their fiscal probability is not sustainable and there is a 100% probability that this ends in default. Everytime the debt comes due, the whole system breaks. The outcome is always hyperinflation or default, which are fairly similar in their effects. This ends badly, either revenues need to be increased or costs need to be decreased. We have made promises that we can’t afford to keep, even if tax rates went up to 100% it would not solve the problem and would obviously be disastrous for the economy. This is the largest Ponzi scheme in human history. As the bubble pops during our lifetime it’s going to get very ugly. Like all Ponzi schemes, the longer they are able to hold their disastrous financial situation together due to their trust in them, the greater the eventual damage will be when the bubble pops. The Power of Zero paradigm is based on the belief that tax rates will go up in the future and that spending will have to go down. We want to take steps to protect ourselves from this reality by systematically repositioning your tax-deferred dollars to tax-free.   Mentioned in this episode:Medium: The Mathematical Certainty of U.S. Government Defaulthttps://medium.com/@ptolemy.3/the-mathematical-certainty-of-u-s-government-default-b53ba0e89da3
The SECURE Act Passes–Implications for Power of Zero Planning with David McKnight
The SECURE Act was passed a couple of weeks ago and we now know what it’s implications are. The big thing that everyone is talking about is that it eliminates the lifetime stretch provision for non-spouse beneficiaries of IRA’s, 201(k)’s, and Roth IRA’s. Now, if you’re leaving your IRA to a non-spouse beneficiary like a child, they will have to realize it as income over the following ten years. If your child will inherit your IRA, they will probably do so when they are at the apex of their earning years. The question is if this happens 20 years from now, will tax rates be higher or lower than they are today? That money will be piled on top of all their other income and they will be taxed at their marginal income. This is a backdoor tax increase. This is a money grab by the IRS unless you do something about it. This even applies to Roth IRA’s. If that money gets distributed over the next ten years, it will probably end up in a taxable account that the IRS will start earning money on. If you have an IRA, you need to ask yourself if you will have significant amounts of money in those accounts at the end of your life and might they go to a non-spouse beneficiary. This underscores the importance of doing Roth conversions during your lifetime. If you have a large IRA and plan on leaving it to the next generation, you need to consider what taxes will look like in the future. There has been a new estimate that the SECURE Act will generate $15.7 billion in tax revenue over the next decade. The implications for retirees will be largely positive, but the heart of the law is about forcing people to pay higher taxes in the short term. When these beneficiaries inherit these accounts, they will be forced to realize the income whether they need it or not. Once they pay the taxes, they will have to put the money somewhere and the question will be where do they put it. Traditional tax-free options like a Roth IRA are too prohibitive so it will likely end up in the taxable bucket, where the IRA will benefit once again. This is where the L.I.R.P. comes into play. It’s an optional place to put the money that comes with a number of additional benefits. This makes an even more compelling case for people who were still on the fence. They now also have to consider if they want their beneficiaries paying up to half the inheritance in taxes. This is an opportunity to start doing some tax planning, we still have six years to stretch out our tax liabilities if we act now. The other big change coming with the SECURE Act is the required minimum distribution age going from 70½ to 72. 80% of Americans with RMD’s are taking more than they need to anyways so this won’t impact them too much. The last change allows people to do backdoor Roth conversions after the age of 70½. The big question that people now have to ask themselves is “do you think you will have money left over in your IRA when you die?” Because if you will, do you really want to have scrimped and saved for your entire life only to have your beneficiaries pay half the amount in taxes? We need to be taking advantage of the next six years. Don’t wait to only pay taxes at much higher rates because at that point, the sale will be over.
Will the POZ Approach Increase My Medicare Premium? with David McKnight
One of the most common questions that David gets is regarding what happens to the Medicare Part B premium if someone engages in a Power of Zero tax strategy. Are there unexpected consequences of shifting money from tax-deferred to tax-free? When you do a Roth conversion, it doesn’t count towards the income thresholds that determine whether you can do a traditional Roth IRA, but it does have an impact on your Part B Medicare premium as well as your prescription drug premium. IRMAA stands for income-related monthly adjustment amount and it’s basically a higher premium charged by Medicare Part B and D to individuals that reach certain thresholds. Medicare Part B helps pay for certain services like outpatient care and for the average American they pay 75% of the Part B premium. If you are taking advantage of the 22% and 24% tax brackets you are going to move through two different thresholds when it comes to IRMAA and could be looking at an additional $2000 in costs per year when doing Roth conversions. At the top of the 24% tax bracket, it could be a little over $3000. The thing to keep in mind is you’re only paying this extra premium in the years that your income goes up due to the Roth conversions, it doesn’t mean your premiums will stay that way forever. The question then becomes “is the increase in premium worth it?” The simple way to find out is to do the math. If tax rates are going to double in the future, will those taxes be more or less than the two to three thousand dollars in increased premiums you’re going to pay now? You can also just compare the cost to the tax rate increases coming in 2026. You’ll probably find that your tax rate will still be more than the increase in your premiums. When you get money shifted at historically low tax rates to avoid a doubling of tax rates over time, but you have to pay a little bit extra, you’re still much better off. Pay the higher drug premium now and avoid the tax freight train that is bearing down on your retirement.
Will the Power of Zero Approach Still Be Valid after 2025? with David McKnight
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.
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Stats
Episode Count
64
Podcast Count
1
Total Airtime
19 hours, 19 minutes