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Ep 37: Why Your Tax Rates Could Double (No Matter What) with David McKnight

July 17, 2019
Micheal Coleman texted a glowing testimonial to David about his latest book, “The Volatility Shield.” We often talk about why your taxes could double in an effort to keep the country solvent because of the vast unfunded obligations like Social Security, Medicare, and Medicaid. However, there is anot...

Episode Transcript - Why Your Tax Rates Could Double (No Matter What) 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.
0:00:19
Hello there. David McKnight. Welcome to The Power of Zero show. As always, I'm grateful that you're taking time out of your busy, busy schedules to spend some time with me to talk about the coming tax freight train. Before we get started, as always, we like to urge you to subscribe to the podcast in whatever medium you prefer, whether it be YouTube, iTunes, what-have-you, that way every time we have a new episode, it gets delivered right to your inbox. As you know, I'm the author of The Power of Zero, Look Before You LIRP, and my most recent publishing event which is The Volatility Shield.
0:01:03
I'd like to share with you briefly for those of you who have not deigned to go on Amazon to get a copy of The Volatility Shield and read it—it's a short read, it's only 100 pages long, it's in a novel format, it's what I call a mini novella, tells a story but embedded in the story are financial principles that are actually absolutely critical to your retirement well-being—I want to share with you a quick testimonial—this is a completely unsolicited testimonial—someone in the financial services industry by the name of Michael Coleman, he's got a fairly good following in the financial service industry. This is the text that he sent me, completely unsolicited, he says, “Dave, it's Michael Coleman. I just finished The Volatility Shield. I'm truly speechless. It is the best book I've ever read on what we do and top 10 all-time of books I've ever read. On a flight to Atlanta, I finished the whole thing, just got off the plane, I literally cried three times and audibly cheered ‘Yes!’ at the end. I'll be giving copies to all my offices and all my clients, friends, and family. Bravo, my friend. Bravo. A true and vital masterpiece.” As an author, your heart is always warmed when you get these types of testimonials. Go to Amazon, take a look at it. If you like it and you want to buy it in bulk discount, you can certainly go to thevolatilityshield.com.
0:02:34
Today, I am going to talk about why your taxes could double no matter what. We often talk about how your taxes could double in an effort to keep our country solvent because of the vast unfunded obligations for Social Security, Medicare, Medicaid, interest on the national debt, that's one part of it. But there is another scenario in which your tax rates could double and it has nothing to do with the national debt, it has nothing to do with Social Security, Medicare, Medicaid. To open this up and set the table for this, I'm going to tell you a story—this may be a story I've told in previous podcasts, I don't think so, even if it is something I have told, it's worth repeating—I was on my way to a meeting—and this was in Minneapolis—and the driver who was taking me in the limousine to the meeting struck up a conversation with me. He was about 65, I imagine, and I think that he's pretty proud of all of the things he's accomplished from a financial perspective and he found out I was in the financial services industry and he wanted someone to share the story with. He says, “Look, I'm only working because I want to. I'm working just to put a few lumps in the gravy, that's really it.” He says he's got a pension, his wife's got a pension, he's maybe earning $20,000, $25,000 a year, he's got a large 401(k) that has $1 million in it, and he feels like he’s got the cat by the tail, he's done everything perfectly, and he didn't really need to change anything. He sort of challenged me to say, “Name one thing I can do differently that would improve my financial situation.” I asked him, I said, “First of all, tell me what tax bracket you're in. It's always, always important to figure out where you are in the tax cylinder. What tax bracket are you currently in?” The reason that's so important is because you want to know what is going to be the cost of implementing any sort of asset-shifting recommendations. He told me—because remember, anything that you shift by way of a Roth conversion or shifting money out of tax-deferred to an LIRP, that's going to be taxed right on top of all your other income. You need to understand the implications of that shift—at the time, this is before the tax break, he was in the 15% tax bracket and his line 10 on his tax return, which of course is your taxable income, it used to be line 43, now it's line 10, he said it was about $40,000 after all of his deductions. I imagine that he was only taking advantage of the standard deduction. At the time, I think the top of the 15% tax bracket went all the way up to $75,000. First of all, I congratulated him, “You've done a good job of accumulating money and I think that you're going to be in good shape. The only thing that gives me pause is what would happen to your tax bracket if either you or your spouse died? What would happen?” He said, “I don't know. What would happen?” I said, “You would go from a 15% tax bracket as a married couple,” and I think at the time it was up to a 25% tax bracket, and he says, “What do you mean?” I said, “Do you know single people have a different income threshold at which point they bump into the next tax bracket than married couples do? Those early tax brackets basically get chopped in half,” and he says, “I guess I've never really thought about that. What would you do if you were in my situation?” I said, “Well, 15% tax bracket is a good tax bracket, it's historically low. If all you did was convert up to the top of the 15% tax bracket, which was about $40,000, $35,000 per year, then you would be able to shelter $35,000, get that into a Roth IRA, do it at historically,” at the time was historically low tax rates, “Pay only 15% from a federal perspective,” maybe 6% more from state in Minnesota, “And you would be able to protect $35,000 per year each and every year that you're both still alive and get that into tax-free and avoid having to pay tax at the 25% tax bracket.” I saw those sort of the light bulb go on inside his head and he realized, he says, “I tell my situation to a lot of people, nobody has ever said that to me.” If there's a possibility that you or your spouse could die in the next 20 years, your tax rate is going to double no matter what.
0:08:03
The reason I tell you this story is because The Power of Zero principles can be very, very powerful in sheltering you, not just from the impact of higher taxes that come about because we don't want to go broke as a country, but it's very, very effective in planning for a situation in your life where you may be filing as a single taxpayer. When you file as a single taxpayer, you hit each subsequent tax bracket much, much sooner, about twice as soon and you'll find yourself in a situation where if you are living on the same amount of money as you were when you were married, you could literally be in a double tax scenario, your marginal tax rate could have doubled by that point, which underscores, of course, the importance of trying to systematically reposition money from tax-deferred to tax-free by way of Roth conversions and LIRPs. Why? Because if you pay the piper at historically low tax rates today, what happens? What happens is if you're a single person, then at that point, you get to take the money out tax-free. But if your money goes to the next generation, then they get to receive the money tax-free at a period in time when tax rates are likely to be much higher than they are today at a period in time when your heirs are at the apex of their earning years and they can least afford to pay those high tax rates.
0:09:36
Remember, shifting money to tax-free doesn't just benefit you during this life, generally, it can benefit people who are planning to spend your money after your death. The last thing you want to do is scrimp and save, scrimp and save, scrimp and save your whole life only to give up to the IRS and have only 50% go to your children. You have to remember that when you're in your—we have what we call the Go-Go years, Slow-Go years, and No-Go years—if you're in the Slow-Go years or the No-Go years where you're not spending a lot of money and your lifestyle isn't very extravagant, you're likely in a low tax bracket, much lower than the tax bracket that your children would have to pay were they to inherit your tax-deferred assets. It makes sense every year to say, “What tax bracket am I in? How does that compare with what my children would have to pay? Does it make sense to shift up at the very least to the top of the tax bracket that I'm currently in?” and of course, if you're in a 22% tax bracket right now, it makes a whole lot of sense to look at what the 24% tax bracket does for you because that's going to go way up to three-hundred twenty some odd thousand dollars before you go up into the 32% tax bracket.
0:11:01
The long and the short of it today, the main message I wanted to communicate today was even if tax rates didn't double—I find that increasingly more implausible—but even if tax rates didn't double in order to keep our country solvent, they could double for you if you end up having a spouse die, either you or your spouse, you could end up living 10 years in a single-filer tax rate. You can find that's going to eat up your assets a whole lot quicker, at that point, it's going to be too late to do the Roth conversion because if you do the Roth conversion, the taxes on those conversions are going to be at that double-tax rate which is, of course, what you're trying to avoid. It always makes sense, if you're married, to really take a look at what your tax bracket is compared to what it would be were you single. If you look at Chapter 6 of the updated and revised version of The Power of Zero—they're not updated for 2019 but it's certainly for 2018—the tax cuts are there, you can see what tax cylinder you're in, you can see what tax rate you would be in if you had a spouse die, and how much more of your assets you would lose because of those increased tax rates.
0:12:26
That is really the essence of the message I wanted to communicate today; we are at historically low tax rates, they're especially good for married people. You hear about the marriage tax penalty, I see nothing but good things for married people when they stay married and they pay taxes at married rates versus single rates, it's great. Not all countries are like this so take advantage of those low, low rates while you're married and while they’re historically low.
0:12:50
Again, subscribe if you want an email every time we get a new episode out, it'll come right to your inbox, you'll know exactly when it's ready to air or ready to listen to. Thanks for being on the podcast today and we will look forward to chatting with you next week. Have a great week.

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