A tax freight train is bearing down on your retirement. To protect yourself, you'll have to harness The Power of Zero.
Hi there. David McKnight. Welcome to The Power of Zero show. I am the best-selling author of The Power of Zero, Look Before You LIRP, and The Volatility Shield. Grateful that you are spending a few moments out of your day to learn more about The Power of Zero paradigm. If you are looking to buy any of my books in bulk, you can go to powerofzero.com/Books. You can follow me on Twitter, I'd love a follow on Twitter at @mcknightandco. If you need help navigating all of the pitfalls that stand between you and the 0% tax bracket, head on over to davidmcknight.com, fill out the contact form, and we'll be happy to hook you up with a qualified Power of Zero advisor in your area. If you are an advisor and are looking to transition your practice to a Power of Zero style practice, you can go to powerofzero.com and opt-in to the video series there. If you want copies of the DVD/Blu-ray Combo Pack of our movie, The Power of Zero: The Tax Train Is Coming, you can go to thetaxtrain.com. You can also stream the movie wherever movies are streamed. Finally, we would love it if you put a review of any of our books on Amazon or this podcast at iTunes, it really does help.
By the time you are hearing this, for all intents and purposes, that whole seven-year timeframe within which to systematically reposition surplus assets from your tax-deferred bucket to the tax-free bucket, that seven-year time frame will have diminished by one year. Once you get past December 31st, and really for most custodians of money, it's probably closer to the 15th of December, that's when most of them shut down the ability to do Roth conversions, but for IRS guidelines, you have until December 31st. But for all intents and purposes, we now only have six years left within which to reposition dollars from tax-deferred to tax-free before tax rates go up for good.
The tax sale of a lifetime, as I refer to, in chapter six of the updated and revised version of The Power of Zero, the tax sale of a lifetime is growing shorter. Every year that goes by, we have fewer years within which to transition those dollars to tax-free. Every time we get to the beginning of the year or the end of the year, as it were, I have people ask me the question, “Gosh, Dave,” this is last year, “We went from eight years to seven years,” and this year, “We went from seven years to six years. What is going to happen when we get to the point where there are only two years left or we get to 2026 and the tax sale is over altogether? What is going to happen to The Power of Zero paradigm? Will The Power of Zero paradigm be null and void after 2026 or in 2025 when you only have one year left within which to take advantage of historically low tax rates? What will happen to The Power of Zero worldview? Will it simply disappear into the ether or will it still be a valid approach to retirement planning?”
You gotta remember that I wrote The Power of Zero in 2013, it got published in 2014. Between 2014 and 2017, there were lots of people taking advantage of The Power of Zero strategy before they ever even had a clue that there was going to be a tax sale. The notion from 2013 to 2017 when I wrote the book 2013, 2014, 2017 was the last year before tax rates went on sale, people were still considering those tax rates in the big scheme of things to be a good deal of historic proportions. Just because the tax sale ends in 2026 and we revert right back to what tax rates were in 2017, remember when the tax rates expire in 2025 and we go back to the pre-2018 tax rates, everything's going to be the same, in other words, we will still enjoy the same opportunity to take advantage of low tax rates. They won't be quite as low as they were during the tax sale of a lifetime but they're still going to be low given where tax rates have been historically and given where tax rates are likely to go in 2028, 2030 and beyond. Remember, tax rates in 2026, if they revert back to 2017 tax rates—which they will according to current law—that's still a good deal, that's still nothing to keep us awake at night.
Now, remember that the main thrust of the POZ message is this, it says that in a rising tax rate environment, there's an ideal amount of money to have in your taxable and tax-deferred buckets. Everything above and beyond those ideal amounts should be systematically repositioned to tax-free. I've always maintained, and my books have always maintained, that come 2028, 2030 and beyond, tax rates will be steadily on the increase. I think that they'll be dramatically higher in 2030 than they will be 2026. Remember, so long as we're in a rising tax rate environment and so long as you are paying taxes at a lower rate today or in 2026, then you would have paid, had you postponed the payment of those taxes until some point further down the road when tax rates are higher, then mathematically speaking, you are getting a good deal, mathematically speaking, you will have more money by paying taxes at those low tax rates than you will if you postpone the payment of taxes until somewhere further down the road.
Remember, the whole name of the game here is it's a spread, we're trying to pay taxes at a lower rate today than we will in the future. That benefit, that spread, the difference between that low tax rate and that high tax rate is a benefit that accrues to us. It helps us ring all the more efficiency out of our tax dollars by taking advantage of low tax rates today to avoid having to pay those high tax rates much further down the road. The questions that you really need to ask yourself, and I think I've made the answer to this question abundantly clear, is are we in a rising tax rate environment? When 2026 rolls around, are tax rates likely to stay level for the rest of our lives? Are we likely to experience higher tax rates down the road? Remember, The Power of Zero vision, The Power of Zero worldview, The Power of Zero strategy is always operational, it's always in effect in a rising tax rate environment. If we were in a lowering tax rate environment, if the experts predicted that tax rates are either going to be staying the same level or going down over time, then The Power of Zero worldview would become, like I said, null and void. But we are not in that type of scenario.
Now, the other question that people sometimes ask is they say, “What if I get to the point where I only have two years left? In other words, there are two years left where maybe we're in 2024 and I only have 2024 and 2025 to take advantage of these historically low tax rates, should I go ahead and try to get all the shifting done during those two years or should I spill over into 2026 and beyond where I'd be paying some higher tax rates?” Let me say this, I think that everybody's situation is different but I also think that if you are planning on shifting all of your money during those two years, you have to be supremely cognizant of what tax bracket you may be bumping up into if you got all the shifting done in those two years. I think that if you have a substantial amount of assets that would be required to be shifted to get you to the 0% tax bracket and getting all that shifting done in two years is what you're looking to do, I think that would likely bump you up into the 37% tax bracket which, remember, we don't want to double your tax rate in the short term to avoid a doubling of tax rates over time. Mathematically, that doesn't make sense. We want to stretch out that tax obligation over a long period of time as long as we can before tax rates go up for good.
I am not opposed, for example, if this were 2024, I would not be opposed to you paying some taxes during the tax sale which will be 2024, 2025, and then letting some of that taxation spill over into 2026 and beyond simply because there are worse things in the world than paying a few extra points in tax over some of those years and that's what it amounts to. What could be worse than that? Maybe waiting until 2028, 2030, or beyond when tax rates are much higher, potentially twice as high as they are today. Remember, paying taxes at 2026, 2027, maybe even 2028, that's not the end of the world. Postponing the payment of a tax until tax rates are potentially twice as high as they are today, that is something that we want to absolutely avoid at all costs.
Once again, if your plan requires you to bump into 2026, 2027, 2028, I think that there are worse things for your financial plan. We need to really look at the math, we need to look at the thresholds on these tax brackets, and really, it comes down to math, by stretching those tax dollars out into 2026, 2027, 2028. Are we better off paying those few extra points and taxes than potentially trying to get all the heavy lifting done before 2026 and potentially rise into a much higher tax bracket? Even while taxes are on sale, you don't want to rise into a tax bracket that you wouldn't otherwise have to pay.
The long and the short of it is if you average the tax rates during the tax sale with those few years of tax rates, you may have to be paying beyond 2026. Before tax rates go even higher, you're still going to be in a much better position than you would have been had you paid all of your taxes prior to 2018. In other words, you're looking at your effective tax rate. If we average the tax savings from the tax sale with the normal tax rates that we might have to pay 2026, 2027, 2028, if we average it all together, we're still going to be paying a lower tax than we would have paid had we done all of the shifting and all of the taxpaying prior to 2018. That's the long and the short of it. It's not the end of the world if we get to 2026. The Power of Zero paradigm will still be in full force. We will still have our doors open. It will still be valid.
The basics of The Power of Zero principle, the basic concepts in The Power of Zero will all still be in full force even if tax rates go up in 2027 or 2028 because remember, in a rising tax rate environment, we want to take advantage of low tax rates. If tax rates are on this steady upward trajectory, you're always going to be better paying taxes at that lower rate than postponing the payment of those taxes till some point much further down the road. It's just not going to be quite as good if we have to wait beyond 2026, but like I said, we'll still be in a rising tax rate environment. All of these strategies will still make a lot of sense.
That's the show for today, keep that in mind as we approach 2026. Of course, the same time next year, we'll be looking at a scenario where we only have five years within which to get all the heavy lifting done. That shouldn't panic you. What should panic you? Potentially waiting until 2028, 2030, and beyond to pay taxes on all your retirement accounts because that's when you will look back on the year 2020, 2021, 2022, 2025, 2026, 2027, you’ll look back on all these years and say why did I not take advantage of tax rates while they were historically low? Why did we not take advantage of tax rates while they were on sale? Because remember, all tax rates have to do in the future is to go up by 1% for the math here to make sense. The question you really gotta be asking yourself is, like I say over and over again, is the tax rate you're paying today going to be higher or lower than the tax rate you could potentially be paying somewhere down the road?
All right, folks, thanks for spending a few moments with us again. Remember to subscribe, that will make sure that you get all the content immediately. You'll get a push notification that will tell you exactly when a new episode is ready and exactly what we'll be talking about. Again, if you're looking for a Power of Zero advisor, don't hesitate to go on over to davidmcknight.com, we’ll happily hook you up with someone in your area. As well as if you're an advisor and you want to become a Power of Zero advisor, go over to powerofzero.com, opt in to the video series. Once again, if you need books in bulk, head on over to powerofzero.com/Books and you can get all of our books in bulk. Thanks for being on the show today. We will talk to you next week.