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A tax freight train is bearing down on your retirement. To protect yourself, you'll have to harness The Power of Zero.
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Hi there. David Mcknight here. Welcome to The Power of Zero show. Thanks for taking a little bit of time out of your busy, busy schedule to learn more about The Power of Zero paradigm and how you can get to the zero percent tax bracket. I am the best-selling author of The Power of Zero, Look Before You LIRP, The Volatility Shield, and coming on November 17th—but you can pre-order now—Tax-Free Income for Life.
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If you are interested in finding someone who can help you navigate your way to the zero percent tax bracket—remember, you don't get to the zero percent tax bracket by accident. There are literally dozens of pitfalls that stand between you and the zero percent tax bracket. You need a steady hand, someone who can help you circumnavigate all those pitfalls—head over to davidmcknight.com. We'd be happy to hook you up with a qualified advisor. If you're looking to buy any of my books in bulk, you can go to powerzero.com/books. Of course, as always, I would love a follow on Twitter.
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Today we are going to talk about, I have long been talking about how tax rates in the future, even 10 years from now, are going to be dramatically higher than they are today. I've often referred to David Walker, who back in 2008, said the tax rates would have to double to keep our country solvent. Every year that we postpone doubling taxes, the national debt will grow by two trillion dollars per year on average. It was a lot lower back in the day. We're hitting the one trillion dollar mark and then moving forward, we're going to start hitting two trillion, three trillion, four trillion, five trillion. He said if we do not double tax rates in 2008, the national debt would grow on average by $2 trillion per year until we hit $53 trillion at which point all of the revenue flowing into the US treasury, at that point, would only be enough to pay the interest and all that debt, let alone any principal, let alone a single dollar for Social Security, Medicare, Medicaid, or any of the other huge budgetary expenses.
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I've talked a lot about David Walker and he's got a lot of credibility, frankly, having been the comptroller general of the federal government for 10 years under Bush and Clinton. But I wanted to bring some new voices into the conversation. People other than me or David Walker who have taken a look at the lay of the land from a fiscal perspective for our country and made a very, very similar conclusion. These are famous people. In many cases, they're billionaires who are weighing in on the future of tax rates. I think that as we move forward in time and as the debt starts to mount and ultimately skyrocket, we're going to see more and more people that come down on our side. Remember there's no way you can print yourself out of it. All of the things that we've been paying for, Social Security, Medicare, Medicaid are all tied to inflation. As inflation goes up, the costs of these programs grow up, you cannot print your way out of it. Because printing your way out of it increases inflation and increases the cost of these programs commensurately.
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Let's talk about Ray Dalio. For those of you not familiar with Ray Dalio, he is the Bridgewater Associates co-chairman. This is what he says. He says, “The US will have little choice but to raise taxes in the coming years to offset its mounting liabilities and debt. The national debt, pension liabilities, and health care liabilities will ultimately have to result in higher taxes since defaulting isn't an option.” He then goes on to say, “We're dealing with almost a currency issue, longer-term. In terms of what is the value of currency when those liabilities, not only the debt liabilities but the pension liabilities and the health care liabilities, which are like debt, they are promises that have to be paid. They will either be paid by higher taxes or they'll be not paid and defaulted on.
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In past episodes, we have discussed the implications of defaulting on our debt. That's why he's sort of speaking up out of both sides of his mouth. He says, “We could default on our debt. We could default on Social Security, Medicare, Medicaid, but the consequences are unthinkable.” That's why it seems like he's talking out of both sides of his mouth. I've also had a podcast in the past where I talk about, I think that's Episode 63, whether we will default in our debt. If so, at about what point in time we will.
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The next person to weigh in here is Leon Cooperman. You may know him as the founder of a hedge fund firm, Omega Advisors. He's worth $3.2 billion. Economically, he knows wherever he speaks, he says that taxes are on the way up post-crisis. When he says post-crisis, he's referring to the Covid-19 crisis. He says, “Regardless of who wins in November, taxes are going up.” He says, “Here's the reason. We've had a leftward shift in our country no matter who wins the presidency in November, the tax revamps will likely change capitalism forever.” This is the most telling statement in all of what he said in this particular article. I want you to pay close attention to it. I think it's very telling. He says, “When the government is called upon to protect you on the downside, they have every right to regulate you on the upside.” This sounds a little bit like a fixed index annuity. If we're going to protect you on the downside, we have to limit your upside as well. What he's basically saying is that capitalism has changed forever. When you can bring the federal government in to rescue the stock market and you put these safety nets in place on the stock market, that is going to limit, and you deploy massive amounts of resources in the process, it's going to limit how much you're going to be able to keep on the upside.
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It says, “As a result, Cooperman, a staunch Republican, predicted that taxes must rise no matter which party wins the White House. And that will affect some of Wall Street’s favorite goodies. The only difference will be how quickly tax rates go up, he indicated.” That sort of echoes what Dr. Martin Eichenbaum said in our movie, The Power of Zero: The Tax Train Is Coming, we can argue over how high tax rates will go or how quickly they're going to go, but they are going to go up.
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This is what he says, and this is what I've echoed in a lot of my talks and explanations, the taxes will go up, “Quickly if Biden wins, slowly if Trump wins, but taxes have to go up.” Regardless of who wins, tax rates are going to go up. The only variable is the speed with which they go up.
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“Previously, in 2017, Cooperman was in favor of President Donald Trump’s tax cuts, which lowered individual rates for wealthier Americans and dropped the corporate tax to 21% from 35%. He indicated these reductions would help the economy.” Then he goes on to talk about what Elizabeth Warren had proposed with her wealth tax. Elizabeth Warren had proposed a 2% wealth tax on dollars that you possessed above and beyond, maybe it was $50 million, or something like that. That's 2% per year, by the way. He says, “Never one to tamp down his rhetoric, Cooperman lambasted the notion, saying it would lead to ‘unnatural acts, be near impossible to police, and is probably unconstitutional.’”
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All right, let's move on to Ed Slott. Ed Slott’s a friend of mine. He has written blurbs and forewords for my books. He will be writing a blurb for Tax-Free Income for Life. That's going to be on the back cover. Ed Slott and I are of kindred spirits in the sense that we believe all the same things. This is interesting, I'm trying to give you a lot of different perspectives here. He says, “There is a very good chance tax rates will go up before 2026.” A lot of this, of course, has to do with who wins the White House in November. Things are looking more and more dismal for Donald Trump if you just pay attention to the polls. Should Joe Biden get elected, there's a good chance, and if he gets control of the senate as well, that's a possibility too, that the tax sale of a lifetime could end before 2026. Ed Slott, at least, seems to think so. He says, the government just wrote a two trillion dollar check on a bank account with no money in it. Somebody's going to pay the bill, and chances are it's going to be taxpayers.”
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Just a couple of insightful commentaries from Ed Slott. Let's move on to Larry Kotlikoff. Larry Kotlikoff is somebody who occupies about 10 minutes in our movie. He is the foremost expert on what we call fiscal gap accounting or generational accounting. He's at the Boston University and he's one of the most famous economists in the world. He actually ran for president back in the day. He didn't think he was going to win. But he just wanted to shine a spotlight on the fiscal, the sort of tragic fiscal trajectory that our country was on. He says, “Given the outlook for higher taxes, advisor clients should consider converting their traditional or rollover IRA into a Roth IRA,” when? Right now. “Clients will pay taxes now on the money that is converted in order to enjoy tax-free withdrawals later. Moreover, if the value of an IRA has dropped during the pandemic, its tax burden today may have also declined.”
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This is what we've been saying over and over and over again. There has never been a better time in the history of our country to be implementing the Power of Zero principles. Why? Simply because tax rates have never been this low, we're in the middle of the tax sale of a lifetime. Should it continue, we will have six years during which, take advantage of those historically low tax rates. The stock market is down so the cost of converting a portion of your stock market portfolio is going to be lower today than it will likely ever be in your lifetime. It makes sense to make hay while the sun shines.
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He also says, this is interesting, I've long slammed municipal bonds. We've been told that municipal bonds are tax-free, but they don't pass either of the tests that I hold out for true tax-free investment. Remember, a true tax-free investment should be free from federal tax, state tax, and capital gains tax. Municipal bonds are free from federal tax. They're not free from state tax. In every instance, you've got to buy it in the state within which you reside. If you buy it in the form of a mutual fund, or even if you don't buy it in the form of a mutual fund and appreciate some value, you sell it and gain, you will pay capital gains tax. The second thing I'm looking for in a true tax-free investment, it does not count as provisional income, it does not count against the thresholds which cause social security taxation.
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Those are two good reasons to not buy municipal bonds. Dr. Kotlikoff gives us a third reason. The article says, “He also warned about investing in municipal bonds because the fallout from the pandemic has ravaged many state budgets.” He says, “Be careful about investing in any state government without doing a fiscal gap analysis. This is not a good time to be in munis.”
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Then Larry Swedroe who's the last person we're going to quote here, he's the principal director of research for Buckingham Strategic Wealth. He appeared at a symposium at The American College with Dr. Kotlikoff. He echoed much of what Dr. Kotlikoff said. He says, “Whatever party is in power we're likely to see a significant increase in taxes or reduction in benefits for those who are wealthy. We almost certainly will see a dramatic increase in the wages that are taxed.”
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I guess my point here is that more and more experts, really, really smart economists are reading the handwriting on the wall. They're saying, “We will have no choice but to endure higher taxes.” In many cases, they're saying before 2026, that’s six-year window of opportunity that we have to reposition money to tax-free may not last the full six years. I’d love to tell the story of how I've long sparred with The White Coat Investor who's a sort of a semi-retired emergency room physician from Salt Lake who has his own blog. He's a very smart guy and has a real firm grasp on financial issues in a lot of different ways. He basically targeted The Power of Zero about five years ago. He says, “You're crazy to do a Roth conversion. You're absolutely nuts.” Then a few months ago, he opined on his Twitter account that if Joe Biden got elected president with some of the tax proposals that he's been throwing out there, he would probably convert his entire IRA all in one year, to which I responded on his Twitter account, “I'm glad to see you're coming around,” after which, he blocked me. But the point is, more and more people, even the most skeptical of these so-called “experts” are starting to come around to this idea that tax rates in the future are likely to be dramatically higher than today. The chorus is almost deafening and people are uniting their voices, warning you that tax rates in the future are likely to be dramatically higher than today. It's not just me. It's not just David Walker. It's not just Ed Slott. More and more economists are starting to read the handwriting on the wall.
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So what does this mean for you? This means simply that you must take on a sense of urgency when it comes to your tax-deferred accounts. If you still have dollars above and beyond the basic minimal amounts that you want to have in your tax-deferred bucket—remember, you want to have balances in your tax-deferred bucket that are low enough that required minimum distributions are equal to or less than your standard deduction, but also low enough that they don't give you so much provisional income that it causes social security taxation. For most married couples, that's going to be about $350,000. But you got to start getting serious about the amounts above and beyond those basic thresholds that you should have in your tax-deferred bucket and start getting serious about thinking about repositioning these assets from tax-deferred to tax-free. I give you permission to not enjoy paying the tax, but recognize that when given the choice between paying taxes in today's historically low tax rates or postponing the payment of those taxes until some point much further down the road, you're much better off paying them today.
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All right, folks, that's the show for today. Thanks for tuning in. Remember you can get my book, pre-order Tax-Free Income for Life. We will be rolling away, I think in the next week where you can get a copy, you can download a copy of chapter one at davidmcknight.com when you enter your receipt number after having purchased it at any number of locations, you can enter it into a field at davidmcknight.com/books and be able to download chapter one instantly. I'm hoping that happens this week by the time you hear this, head over to davidmcknight.com. Check it out. See if it's there. If not, I think by next week, it certainly should be up and running. Thanks and remember, subscribe. If you want to throw a review on Amazon for any of my books, I would be absolutely tickled pink. Talk to you next week.
