Expecting a Pension? Strongly Consider a Roth Conversion
Release Date: 02/12/2025
The Problem with Target Date Funds
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David McKnight looks at Target Date Funds (TDFs) and why their set-it-and-forget-it approach to investing is NOT something you should rely on. David kicks things off by explaining how TDFs work, including why they tend to be a popular option for novice investors. While it sounds like an excellent approach, David points out two major flaws. “A lot of the problems with TDFs come down to sustainable withdrawal rates in retirement,” says David. The 4% Rule consists of you being able to withdraw 4% of your day one balance in retirement, adjusted every year thereafter for inflation....
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I've Maxed Out My 401(k), Now What?
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In this episode of the Power of Zero Show, host David McKnight discusses the scenario in which you have maxed out your 401(k) and are wondering where you should invest the rest of your money. The episode kicks off with David addressing the type of 401(k)s you should be investing in first. There are two types of 401(k)s: the traditional pre-tax 401(k) and the Roth 401(k). Should you go for a traditional 401(k) or a Roth 401(k)? It all depends on whether you think your tax bracket is likely to be lower or higher in retirement… With the national debt set to hit $62 trillion by the year 2035,...
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The Power Of Zero Show
In this episode of the Power of Zero Show, host David McKnight addresses the claim that sees Paul Atkins owning 54 life insurance policies for an astounding 10% of his $327 million net worth. Someone may ask themselves why someone with such a massive net worth would own so many life insurance policies…and even why someone who has equity in Chinese tech giant Alibaba, holdings in cryptocurrency, and stakes in venture capital firms would also want their wealth growing in cash value life insurance policies. Looking at Atkins, who’s President Trump’s nominee to chair the Securities and...
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The 8 Taxes You Could Pay When Doing a Roth Conversion (Is it worth it?)
The Power Of Zero Show
In this episode of the Power of Zero Show, host David McKnight looks at every possible tax or cost that may result from a Roth conversion. The first tax you’ll have to pay when executing a Roth conversion is federal income tax. Whatever portion of your IRA you convert to Roth is realized as ordinary income and piled right on top of all your other income. David is an advocate for not converting to Roth unless you think your federal tax rate in retirement is likely to be higher than it is today. The second tax you could end up paying when doing a Roth conversion is state tax. The...
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Should You Take More Risk in Your Roth Accounts Than Your Other Investments?
The Power Of Zero Show
This episode of the Power of Zero show explores whether you should be taking more risks in your Roth accounts than in your other investments. Host David McKnight kicks things off by stating that if you have Roth IRAs or Roth 401(k)s in your portfolio, you should be allocating 100% of these dollars to a stock allocation. That’s because these are your most tax-efficient investments and they’ll remain tax-free right up until your death – and even 10 years beyond. Remember: you want the biggest returns in your portfolio to take place in a tax-free environment. David explains which of your...
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Debunking Doug Andrew’s Roth IRA Hit Job Video
The Power Of Zero Show
In this episode of The Power of Zero Show, host David McKnight looks at Doug Andrew’s recent video in which he implored his audience to never use a Roth IRA or a Roth 401(k) again. Andrew sees Indexed Universal Life insurance (IUL) as far superior and believes it should be the source of the vast majority of your distributions in retirement. While David likes IUL in certain circumstances, he isn’t a fan of sales strategies that debase every other viable tax-free alternative in an effort to exalt IULs. For David, the video is riffed with errors, exaggerations and omissions. Moreover,...
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What Percentage of Your Retirement Savings Should You Have in Traditional IRA vs. Roth?
The Power Of Zero Show
What percentage of your retirement savings should you allocate toward traditional IRAs and 401(k)s vs. Roth IRAs and Roth 401(k)s? That’s what this episode explores. Traditional financial guru advice says that it’s impossible to predict where tax rates are going down the road. Therefore, you may hear that your best bet is to simply have 50% of your money in tax-deferred and 50% of your money tax-free. David is somehow perplexed by the guru’s point of view about the future of tax rates being an unknown. However, signs that things won’t be the same appear to be evident. The current...
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The Five Cardinal Rules of Roth Conversions
The Power Of Zero Show
David McKnight goes through his five cardinal rules for doing a Roth conversion. The first principle is simple: don’t do a Roth conversion that bumps you into a tax bracket that gives you heartburn. Not sure about what a heartburn-inducing tax bracket looks like? David shares a simple “rule of thumb” you can follow. In your zeal to get your Roth conversion done before tax rates go up for good, don’t bump into the 32% tax bracket along the way. The second cardinal rule ties into the almost certainty that Congress will extend the Trump tax cuts through 2033 – make sure to stretch your...
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How to Take Advantage of the Retirement Income Valley for Roth Conversions
The Power Of Zero Show
Wondering when you should start thinking about a Roth conversion? That’s exactly what David McKnight dives into in this episode of The Power of Zero Show. The retirement valley is that dip in taxable income that happens after you retire but before RMDs kick in – at age 73 or 75, depending on your birth year. David walks through an example: you’ve got $2 million in your IRA and want to convert all of it to Roth. If you take action during that valley, you can convert more while staying in the 24% tax bracket the whole time. Not taking action now? Think of 2035 as the year tax rates are set...
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In What Order Should I Spend Down My Assets in Retirement?
The Power Of Zero Show
David McKnight addresses the most efficient order in which to spend your assets in retirement. Online programs and algorithms that forecast and run calculations related to your retirement assets suggest starting with your tax-deferred assets like 401(k)s or IRAs. Such tools recommend spending down your tax-deferred assets now, when tax rates are low, and your tax-free assets later – when tax rates are likely to be higher than they are today. Reminder: regardless of the distribution strategy you choose, it should aim to maximize the likelihood that your money lasts as long as you do....
info_outlineDavid McKnight discusses a couple of really good reasons for doing a Roth conversion when you’re expecting a pension in retirement.
David sees the American tax system functioning in a similar way as a graduated cylinder.
Your income goes in and flows all the way down to the bottom. Some of your money gets taxed at 10%, at 12%, 22%, some at 24%, 32%, at 35%, and some at 37%.
Jeff Bezos, too, has some of his earned income taxed at 10% (only for about 3 seconds, though!).
If you’re planning on receiving a pension in retirement, understanding how this “tax cylinder” works will be crucial for maximizing your after-tax spendable income.
David shares an example showing that your pension and the taxable portion of your Social Security will consume all of your 10% bracket, and most of your 12% bracket – and that’s before you draw $1 from your IRA or 401(k).
When you take money out of your IRA or 401(k) in retirement, those dollars will flow into your cylinder and land right on top of all your other income and get taxed at 22%.
David explains that after the expiration of Trump tax cuts, the 22% will become 25% and, over the next 10 to 15 years, your personal tax bracket could be even higher!
If that scenario were to play out, the portion of your IRA or 401(k) that you get to keep could get smaller and smaller…
In case the Trump tax cuts extension does go through, then you could convert your IRA or 401(k) to Roth over nine years of historically low tax rates.
David likes to refer to the Trump tax cuts as the “tax sale of a lifetime” – he shares an example that illustrates why.
David touches upon what you can do, until 2034, to maximize your after-tax spendable income.
Mentioned in this episode:
David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track
PowerOfZero.com (free video series)
@mcknightandco on Twitter
@davidcmcknight on Instagram
David McKnight on YouTube
Get David's Tax-free Tool Kit at taxfreetoolkit.com