Financial Collapse in 3 Years?
The Power Of Zero Show
This episode of The Power of Zero Show revolves around a recent Ray Dalio video in which he issued warnings about the U.S. debt crisis. In the clip, Dalio appears to be giving America three years to get their act together and to right the fiscal ship of state. Dalio mentions the draft of his new book that goes through the mechanics of the debt – and highlights the supply-demand problem he believes will occur if the deficit doesn’t go from the current 7.2% of GDP to about 3% of GDP. Dalio touches upon what people should do when there isn’t an adequate supply-demand balance. He believes...
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Will Safe Harbor Rules Protect You If You Do a 4th Quarter Roth Conversion?
The Power Of Zero Show
David McKnight looks at why many people wait until the fourth quarter to do a Roth conversion, the potential penalties, and what can be done to avoid having to pay underpayment penalties to the IRS. David begins the episode by highlighting the fact that a lot of investors wait until Q4 before they do a Roth conversion – and they prefer to pay taxes on it in cash instead of simply having the taxes withheld by the IRS. From a mathematical standpoint, it’s the correct thing to do because it allows you to get 100% of the converted dollars into your tax-free account. However, if you didn’t...
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How to Avoid the Roth Over-Conversion Trap
The Power Of Zero Show
In today’s episode, David McKnight focuses on whether you should do a Roth conversion, how much you should convert per year, and whether it’s possible to over-convert to Roth. David explains that an effective tax rate is the actual percentage of your income that you pay in taxes after accounting for deductions, exemptions, and credits. For David, the only reason you should do a Roth conversion is if you believe that your effective tax rate in retirement will be higher than your marginal tax rate today. David touches upon a couple of reasons why your effective tax rate in retirement could...
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The Problem with Target Date Funds
The Power Of Zero Show
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?
The Power Of Zero Show
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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Why Does the Incoming SEC Chair Paul Atkins Have 54 Life Insurance Policies?
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...
info_outlineDavid 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 tax liability out between now and then!
There’s a strong likelihood that, once Trump’s second round of tax cuts expire, taxes will rise dramatically in 2034.
The reason for that? The trajectory of the national debt and over $200 trillion in unfunded obligations for Social Security, Medicare, and Medicaid.
The third principle is “Don’t lose your sleep over IRMAA (Income Related Monthly Adjusted Amount) during your Roth conversion period.”
Many people are reluctant to do Roth conversions because they don’t want their Medicare premiums to increase.
Remember: your premiums would only go up over the period in which you’re executing your Roth conversion strategy – that’s nine years or less…
David recommends having a “rip the band-aid off” approach when it comes to both IRMAA and Roth conversions.
Cardinal principle #4: whenever possible, pay the tax on your Roth conversion out of your taxable investments like a brokerage account or cash.
David sees six months of basic living expenses as the ideal balance in your taxable bucket.
The fifth and final cardinal rule is “know your ideal balance in your tax-deferred bucket before executing your Roth conversion strategy”.
David shares a good mathematical reason for not converting 100% of your IRA to Roth even if you think that your tax rate down the road is likely to be higher than it is today.
A cheat code to help you establish the ideal balance in your tax-deferred accounts: if you’re married, it’s about $400,000 (if you don’t have a pension or other sources of residual income).
Are you single? Then, it’s about half that amount.
Keep in mind that a lot will depend on how much Social Security you’re planning on receiving in retirement.
Over at DavidMcKnight.com you can find a calculator to help you with all of this.
Following these five principles will help insulate your money from higher taxes, pay less taxes along the way, and increase the likelihood that your money will last as long as you do.
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