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Ep 27: The Historic Timing of the Power of Zero Message with David McKnight

May 8, 2019
You’re saying tax rates are going up, so you mean I’ve done this all wrong? Not necessarily… you want to put money into your tax deferred bucket when the deduction means the most to you, when tax rates are historically high. You want to take money out of your tax deferred bucket when taxes are low....

Episode Transcript - The Historic Timing of the Power of Zero Message with David McKnight

0:00:05
A tax freight train is bearing down on your retirement. To protect yourself, you'll have to harness The Power of Zero.
0:00:20
Hello and welcome to The Power of Zero show. This is your host David McKnight, author of The Power of Zero, Look Before You LIRP, and The Volatility Shield, all of which are available on Amazon. They're also available in bulk discounts if you want, go to powerofzero.com, you can find out how to get those in bulk discounts as well.
0:00:41
Today, we are going to have a podcast episode that was prompted by a question that someone asked at one of my last workshops. The question was simply this, “Are you saying that I did this all wrong?” I basically had finished my Power of Zero presentation, which many of you have seen, and she comes up and she says, “You've basically convinced me that tax rates are going up, it sounds like I've done this all wrong.” Basically, she had accumulated the lion's share of her assets and the tax-deferred bucket. I responded to her in a way that I think surprised her. I basically said, “No, you've actually done it absolutely perfectly,” and here's what I mean, remember, the whole idea here is that you want to put money in your tax-deferred bucket when the deduction means the most to you. When tax rates are historically high, that's when you want to put money into your tax-deferred bucket. You want to take money out of your tax-deferred bucket when tax rates are historically low and get it shifted to tax-free because remember, the cost of getting into the tax-free bucket is you got to be willing to pay a tax. You just have to make sure that tax is as low as possible when you do so.
0:02:13
Most people that have money in their 401(k)s and IRAs put those dollars into those accounts when tax rates were higher than they are today, if you think back to the decade of the 90s and what tax rates were under Clinton, what tax rates were from 2013 until 2019, the highest marginal rate was 39.6%. Even during the Bush tax cuts of 2003 to 2013, even though the highest marginal tax bracket was only 35%, the income parameters that were attached to those tax brackets were higher than they are today. You could say that starting January 1, 2018, through the end of 2025, basically, until January 1, 2026, we have as low a tax rate as we've experienced in our lifetime. Why is that significant? That's significant because if you've put money into your 401(k) and IRA, you likely did so at a period in time when tax rates were higher than they are today. What does that mean? That means that you were able to put more money into those programs because the cost of doing so was lower, you've got a bigger discount, a bigger deduction on the front-end for putting money into those accounts, you did it at historically high tax rates.
0:03:32
Now, whether this becomes a good deal of historic proportions for you, it depends on what you do during the course of the next seven years, because remember, the time to get money out of text-deferred and into tax-free is once tax rates are historically low, we basically have a period of historically low tax rates. I've said this before, but when people would ask me when tax rates are going up, I'd say, “Hey, look, in some distant unknowable future, probably 10 years from now, tax rates are going to go up,” guess what, we now know the year and the day when tax rates will go up and that is January 1, 2026. We finally have some certainty around the future of tax rates. Now, does that mean that they're not going to go even higher after 2026? No, it's almost a certainty that tax rates are going to go higher after 2026.
0:04:27
If you really want to play your cards right, then you would get those assets repositioned, shifted from tax-deferred to tax-free during the next seven years while tax rates are historically low. Then when they go back up again in 2026, and even higher in 2028, 2030, and beyond, what you've done is you've already paid the piper, you've already done all the heavy lifting to be able to protect and insulate those assets from the impact of higher taxes. I think it's easy to really get discouraged when we talk about all of the fiscal realities facing our country. I just saw an article recently that said that 2035 Social Security goes completely bust, in 2026, Medicare goes completely bust—this is a big deal because Medicare is five times more expensive than Social Security. We are marching into a future where tax rates almost certainly are going to be higher if we want to salvage these two programs. It makes all the sense in the world to start to systematically reposition money from tax-deferred to tax-free.
0:05:36
Now, keep in mind, you don't want to do it all at once, you want to do it little by little, staying in the tax bracket of your choice, one that's not going to give you heartburn, stretch that tax liability out over seven years. Remember, you want to do it quickly enough that you get all the heavy lifting done before 2026, but you want to do it slowly enough that you don't rise into a tax bracket that gives you heartburn.
0:05:58
The next time someone tells you that you did this wrong, that actually is up to you whether you did it wrong or not, because I would say that if you leave your money in the tax-deferred bucket without taking advantage of these tax rates while they're on sale, without taking advantage of the tax sale of a lifetime, then you have basically sort of cemented, made permanent, if you will, your bad decision to put money into a tax-deferred bucket. But we have this amazing window of opportunity, this window of opportunity that is going to slam shut on January 1, 2026, and never open back up again. I tell people all this time, 2030 will roll around and you’ll look back at the year 2019 and say, “Why did I not take advantage of tax rates while they were historically low?” These are good deals of historic proportions.
0:06:54
In summary, I think that what I'm trying to tell you here is that the timing for The Power of Zero paradigm at this point in our country couldn't be more perfect because the cost of getting into the 0% tax bracket is you've got to be willing to pay tax, we're simply suggesting that when given the choice between paying taxes at today's historically low tax rates or postponing the payment of those taxes until some point much further down the road, you're probably better off paying them today. That's the good news, there is urgency, you gotta get it done in the next seven years, and if you don't, the window will slam shut forever.
0:07:29
Now there's one other thing that people like to ask and it's sort of tangential to what we're talking about here, but they'll say stuff like, “Dave, you’ve been preaching forever that tax rates are going to go up, when I read your the foreword to The Power of Zero, Ed Slott talks about how he's been warning people for 20 years that tax rates are going to go up. If you guys have been raising the warning cry for this long and not only do tax rates not go up, they go down, how can we put any faith in your message?” I think that's a good question. That's something that I address on the update in the revised version of The Power of Zero. Look, all of the economists, especially the ones that we interviewed for our movie, The Power of Zero, all of them agree that the solution, the antidote, if you will, to our country's fiscal issues is that we have to either double revenue, reduce spending by half, or some combination of the two. Guess what, with the 2018 Trump tax cuts, we actually did the exact opposite, we reduced revenue and we increased spending by $1.5 trillion over the next 10 years to pull it off. David Walker's fond of saying, “We had our dessert before we ate our spinach,” we did the exact opposite of what we were supposed to do. What does that mean? That means that the eventual fix to our fiscal problems is going to be all the more austere, all the more severe, all the more draconian when it actually comes time to pay the piper. When will come the time to pay the piper? I’ll give you an example here, I remember looking at CNN when they were trying to raise the debt ceiling. We always do these things at the 12th hour, we wait until the very end, I remember looking in the upper left-hand corner of the screen and it said, “The United States defaults on their debt in 28 minutes,” or something like that, we always wait till the 12th hour and I don't think this is any different. We are waiting as long as we possibly can, we're kicking the can down the road as much as we possibly can simply to avoid making a tough decision. Remember, the tough decisions are what get you voted out of office, tough decisions, taking a stand on important vital issues is going to tick somebody off, and when it comes to reforming Social Security and Medicare, it's probably going to tick off some major voting bloc, like the baby boomers, who fear that they're not going to be able to take the money out that they put in. I remember, I was reading in the paper today about Finland, Finland is having the same issues as we are, they're trying to reform, essentially, their universal health care plan because they're going bankrupt and nobody would vote for it, so now they are mired down in a major financial crisis simply because they can't muster the will power to make tough decisions on how to reform their health care. This is going to come into America, come into a theater near you very, very soon, we're starting to see things happening in other parts of the world, of Venezuela, Greece that are if not already happening now, are going to be happening very, very soon in the United States.
0:10:51
In summary, the good news is that we have this window of opportunity in which to take advantage of historically low tax rates, and that's the ticket to getting into the 0% tax bracket, getting into the tax-free. The timing is perfect, if you have a ton of money sitting in your tax-deferred bucket, it may be just the right time for you to systematically shift that money little by little over the course of the next seven years.
0:11:13
I do have some good news as it relates to The Power of Zero: The Tax Train Is Coming, that is our documentary that's based on the book, The Power of Zero, we barnstormed across the country interviewing dozens of experts that all have something meaningful to say about the national debt and what it means for the future of our economy and the future of tax rates, that is now available to watch on Amazon, iTunes, Google Play, and reelhouse.org—if you want a gift a copy to somebody, reelhouse.org, you can go buy a code and then email it to that person and they can watch it. It's available on all of those channels. People have asked about Netflix, the thing about Netflix is they spend $15 billion every year manufacturing content for themselves, they're not as interested in taking other people's content. Although we've submitted it to Netflix for review, we're not super optimistic that they're going to take it on. We are also looking at PBS so there may come a time when it appears on PBS and millions of Americans across the country will be able to get this message which is what we're really hoping to do because we're all sitting on the train tracks to the extent that we have money in our tax-deferred bucket and we need to get the money off. We know when the train's coming, we know roughly when it's going to get here, we know on what form it's going to arrive, higher taxes, and we know exactly what we have to do to get off the tracks. That's the message that we're really trying to get out here.
0:12:39
Again, if you want to have this podcast delivered to your email inbox, on whatever channel you choose, whether it be YouTube, Pandora, iTunes, or any of the other outlets out there, you can actually subscribe and it'll be delivered every time we have a new episode, it will tell you what the episode is about. Grateful you took out some time out of your day today to spend some time on The Power of Zero show. We will look forward to seeing you at the same time next week. Talk too soon.

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