The Power of Zero, Revised and Updated
Page 1
Praise for THE POWER OF ZERO
“I’ve always advised that taxes will be higher in the future, but was never able to articulate ‘why’ or deliver that message in a powerful way. McKnight’s book is the most compelling case for this I’ve ever seen. If you’re dumping money into a 401(k) or IRA, you need to read this book today.”
—DAVE COX, THE PRODUCERS GROUP, BRYANT, AR
“David is a retirement visionary. His insights are clear and concise and his action plan to remove the IRS from your retirement picture is irrefutable!”
—RICK WHITE, AMERICAN PLANNING GROUP, INC., RALEIGH, NC
“The Power of Zero offers proven strategies to dampen Uncle Sam’s impact on your retirement. It’s a must read for those who want to take the IRS wild card out of the deck!”
—STEVE PARKER, CPA, MBA, STEVE PARKER & ASSOCIATES, LLC, ORLAND PARK, IL
“The concepts and strategies in this book have proven indispensable in getting my clients to the 0% tax bracket in retirement. Well worth the read!”
—MARK CUPP, SR., LUTCF, CUPP WEALTH STRATEGIES, SANTA CLARA, CA
“The principles in The Power of Zero have empowered me to sound the alarm and rescue my clients’ financial future and security from the looming threat of higher taxes.”
—JAMES “JAMIE” FARRELL, FX SAFE RETIREMENT PLANNING, HUNTERSVILLE, NC
“Meeting David and reading The Power of Zero have completely changed my practice and refocused my planning for my clients. Thank you, David.”
—PATRICK SMITH, BERING FINANCIAL, ARLINGTON, TX
“The strategies behind The Power of Zero have revolutionized my approach to finance, and my clients are the better for it.”
—DAN HAWTREE, CPA, HAWTREE & ASSOCIATES, MONEE, IL
“David’s passion for designing creative solutions for his clients is unparalleled in the industry. His book provides specific insight on why it’s important to reduce your income taxes and pursue the 0% tax bracket. It is a must read for financial professionals and their clients everywhere.”
—SHAWN SIGLER, FINANCIAL INDEPENDENCE GROUP, CORNELIUS, NC
“The Power of Zero is right on at the right time. U.S. taxes are poised to rise dramatically. The math is clear and surprisingly simple. Consumers and advisors need to know and this book tells the story.”
—CLARK S. GARDNER, MCAP FINANCIAL GROUP, OREM, UT
“Essential reading for anyone who wants even the slightest measure of command over their future finances. Far and away the most up to date strategies for anyone wanting to retire. Without these techniques, investors are at the mercy of circumstances beyond their control.”
—NAVI DOWTY, CFA, NAVI DOWTY & ASSOCIATES, INC., WHEATON, IL
“David has an incredible grasp of our country’s current economic condition. The Power of Zero clearly outlines a way to introduce more certainty into my clients’ financial future. Thank you, Dave!”
—WILLIAM E. SPAR, MA, LUTCF, ADVANCED RETIREMENT PLANNING, LLC, PHOENIX, AZ
“Like it or not, taxes are likely to rise and McKnight’s proposal that we reposition our assets now so as to avoid higher taxes in the future could not be more timely.”
—GREG GILLIS, CFP©, LITTLE ROCK, AK
“The Power of Zero is a must read for anyone who is serious about maximizing income in retirement. We use the strategies outlined in David’s book daily to help our clients become as tax-efficient as possible.”
—W. RAY STAGNER, CHFC, CLU, FIDLER WEALTH MANAGEMENT, TULSA, OK
“David McKnight is truly a pioneer in our industry! The Power of Zero has helped me educate and prepare my clients to reposition their taxable and tax-deferred assets to tax-free, through a balanced array of tax-free strategies.”
—BRIAN HANSON, HANSON WEALTH MANAGEMENT, EDEN PRAIRIE, MN
“I have known David McKnight for many years and he is a true visionary. This book will guide retirees through the coming tax crisis by helping them take advantage of the power of the 0% tax bracket.”
—TOMMY WOLFE CURRID, LUTCF, NICEVILLE, FL
“David McKnight is light-years ahead of the financial planning industry. Make sure you and your advisor read this book! You owe it to yourself and your family.”
—BRIAN BYARS, ADVANCED RETIREMENT PLANNING, ATLANTA, GA
“With all the economic uncertainty, The Power of Zero gives our clients a road map to greater predictability, control, and peace of mind in retirement.”
—HAL D. ALLEN, CPA, MACC, ALLRED JACKSON, NORTH LOGAN, UT
“Dave’s ideas and strategies have radically redefined the way we look at retirement taxation for our clients. The Power of Zero lays out a clear and concise road map for anyone looking to shield their hard-earned assets from the impact of higher taxes.”
—MIKE ABBOTT AND CHRIS BENNETT, ABBOTTBENNETT GROUP, CONCORD, NH
“Talking to our clients about the strategies in this book has transformed their retirement and protected them from the tax train wreck that is just around the corner.”
—CHRIS HERKERT, HERKERT & ASSOCIATES, BELLINGHAM, WA
“The Power of Zero by David McKnight offers compelling strategies to safeguard your retirement income in a future where we will likely see much higher tax rates.”
—DONALD GLADHART, CLU, CHFC, WATHENA, KS
“David has distilled the tax-efficient retirement paradigm into a single, powerful book. I’ve been in this business for 30 years, and this message couldn’t be more timely. Thanks, David!”
—CRAIG JERGENSON, CFP©, COACHCRAIG FINANCIAL, COON RAPIDS, MN
“The answer to the problem of higher tax rates is to plan for a tax-free retirement, and McKnight does a great job of laying out strategies that are available to just about anyone.”
—STEVE SMITH, PILOT FINANCIAL ADVISORS, SALISBURY, MD
“Although my clients are well prepared for retirement, they haven’t planned for the devastating effect of taxation on their Social Security. Thank you, David, for writing this book and raising the warning cry!”
—JASON REDDITT, ADVANCED RETIREMENT SOLUTIONS, LITTLE ROCK, AR
“David makes a very convincing argument that retirement is a lot more doable at the 0% tax bracket. The expert advice he provides on how to get there is worth the time it takes to read and implement!”
—EARL R. EASTMAN, PROVIDENCE EDUCATIONAL INSTITUTE, SAN DIEGO, CA
“David has done a remarkable job of explaining how everyone, with just a little bit of proactive planning, can insulate themselves from the threat of higher taxes by creating a totally tax-free retirement. This is a must read for anyone interested in maximizing their wealth.”
—IKE IKOKWU, CFP©, CPA, ATLANTA, GA
The information in this book is for general use and, while we believe the information is reliable and accurate, it is important to remember individual situations may be entirely different. Therefore, information should be relied upon only when coordinated with individual professional tax and/or financial advice. You need to consider your specific situation including your health and legacy goals before acting on any information presented in this book. Please note that neither the information presented nor any opinion expressed is to be considered as an offer to buy or purchase any insurance or securities products and services referenced in this book.
The information provided is not intended as tax or legal advice and may not be relied on for the purpose of avoiding any individual Federal or State tax penalties. David McKnight, h
is employees, or representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax and legal counsel. They are also encouraged to seek advice from their own financial and/or insurance professional.
Copyright © 2013, 2018 by David McKnight
All rights reserved.
Published in the United States by Currency, an imprint of the Crown Publishing Group, a division of Penguin Random House LLC, New York.
currencybooks.com
CURRENCY and its colophon are trademarks of Penguin Random House LLC.
Originally published in the United States in paperback and in different form by Acanthus Publishing, Boston, Massachusetts, in 2013.
Library of Congress Cataloging-in-Publication Data
Names: McKnight, David C., author.
Title: The power of zero / David McKnight.
Description: [Revised and updated]. | New York : Currency, [2018]
Identifiers: LCCN 2018023533 | ISBN 9781984823076 (hardcover)
Subjects: LCSH: Finance, Personal. | Retirement income--Planning. | Investments.
Classification: LCC HG179 .M25123 2018 | DDC 332.024—dc23 LC record available at https://lccn.loc.gov/2018023533
ISBN 9781984823076
Ebook ISBN 9781984823083
Cover design by Lucas Heinrich
Cover illustration by Sashkin/Shutterstock
v5.3.2
ep
For my wife
Contents
Cover
Title Page
Copyright
Dedication
Foreword
ONE: A Gathering Storm
TWO: The Taxable Bucket
THREE: The Tax-Deferred Bucket
FOUR: The Tax-Free Bucket
FIVE: The LIRP
SIX: The Tax Sale of a Lifetime
SEVEN: Putting It All Together
EIGHT: Pensions and the 0% Tax Bracket
NINE: The Tax-Free Road Map
TEN: Frequently Asked Questions
Acknowledgments
About the Author
FOREWORD
Taxes will be increasing. This book is a wake-up call to reality. For the past twenty years, I have been warning both consumers and advisors that the writing is on the wall and the day of reckoning is upon us. This is not a prediction but a result of plain arithmetic.
Our government will soon need huge cash infusions to meet its commitments, and it will have no choice but to raise taxes on those of us who have worked hard, sacrificed, saved, and played by the rules. We were told to put money away for retirement in tax-deferred accounts like 401(k)s and IRAs, and many of us did.
Those who saved the most diligently, though, will soon realize that a substantial chunk of those tax-deferred retirement savings are sitting ducks for a revenue-hungry Uncle Sam. In fact, as your 401(k) or IRA funds grow, so does the government’s share, since it is a partner on your savings. But unlike a traditional business partner, Uncle Sam can increase his partnership percentage of your tax-deferred savings whenever he needs more money, and that day is coming soon.
The question is, then, “Are you prepared?” You can be, but unfortunately, for most people the answer is “no,” because they believe that there is no way this can happen to them. But it can and it will. We have had federal income tax rates exceeding 90%. In fact, from 1936 to 1981, the top federal income tax rate has never gone below 70%! Higher taxes mean less money for your retirement years.
Even if you think you are prepared with a plan, it is unlikely that you are. In fact, in most cases I see, the kind of planning you need to do now to avoid the oncoming tax disaster train is not being done.
If you have to wonder if you have a plan to reduce your income taxes now and in the future, then you do not have a plan. If you don’t have a plan, you will end up with what I call “The Government Plan.” As you can imagine, that is not the plan that is best for you.
The plan that you need must be implemented by you and be done as soon as possible, before the tax train wreck arrives. You need to create a plan to move your tax-deferred funds from accounts that are forever being taxed to accounts that are never taxed. Your best defense is offense—to build tax-free savings.
The good news is that right now we are in the lowest tax rates in recent history. Now is the time to strike in order to create tax-free income for your retirement years and beyond. Even your loved ones can benefit from the planning you do now. The tax code actually includes several tax moves you can make to create tax-free retirement income, but few people take advantage of them. For example, Roth IRAs and life insurance alone can help you and your family end up with more money than you have now, and with more of it tax-free.
There will never be a more cost-effective time to leverage your current assets into tax-free assets. As you move your tax-deferred funds to tax-free territory, you reduce the impact of future tax hikes on your retirement savings.
In this book, David McKnight (who, like me, also loves “tax-free”) provides you with a road map of how to get to the 0% tax bracket, virtually eliminating the tax risk, which, if not addressed, will easily consume a solid portion of your retirement savings.
It’s time to face reality. Taxes will increase, and tax-deferred accounts like 401(k)s and IRAs are the low-hanging fruit waiting to be picked by Uncle Sam. Follow the steps in this book and you’ll keep your hard-earned retirement savings out of Uncle Sam’s reach.
I love tax-free, and you will too.
Tax-free is always better! Pay less and keep more.
—Ed Slott, CPA
Author and Founder of www.irahelp.com & www.theSLOTTreport.com
Founder, Ed Slott’s Elite IRA Advisor Group
August 12, 2013
ONE
A GATHERING STORM
“Delight in smooth-sounding platitudes, refusal to face unpleasant facts, desire for popularity and electoral success irrespective of the vital interests of the State…”
—WINSTON CHURCHILL, The Gathering Storm
On January 11, 2011, a CPA named David M. Walker appeared on national radio and made a grim prognostication: Based on the current fiscal path, future tax rates will have to double or our country could go bankrupt. He then challenged the national listening audience to come up with a four-letter word that would explain why. The calls came pouring in. “Debt?” came one answer. “Wars?” came another. “Kids?” came the next. After a few more wayward guesses, David Walker finally revealed the answer. “It’s math.”
Who is David Walker, and what does math have to do with the future of our country? For an 11-year period starting in 1998, David Walker served as the Comptroller General of the United States and as the head of the Government Accountability Office. In short, he was the CPA of the USA, and the nation’s chief auditor. Having performed in that capacity during both the Clinton and Bush administrations, he knows more about our country’s fiscal state than perhaps anyone else on the planet. Since his resignation in 2008, Walker has been crisscrossing the country, raising the warning cry, and discussing sensible solutions with anyone who will listen.
Due to a demographic glitch known as the “Baby Boomers,” the workers-to-retiree ratio continues to drop, jeopardizing the solvency of Social Security and other entitlement programs.
Source: Board of Trustees (2006, Table IV.B2). Projected using the intermediate assumptions in the 2006 annual report of the Board of Trustees of the Federal Old-Age and Survivors Insurance Trust Funds.
To understand the urgency behind David Walker’s mission, you need look no further than the mathematical realities facing Social Security. The Social Security Act was passed into law in 1935 as the lynchpin of Roosevelt’s “N
ew Deal” with America. When it was first implemented, the math behind it (based on expected birth rates and life expectancies) ensured its financial viability into perpetuity. There were an astounding 42 workers putting money into Social Security for every one person who took money out. Ironically, the official retirement age at that time was 65, well beyond the then average life expectancy of only 62. The program’s administrators didn’t even anticipate that the average American would live long enough to ever draw on Social Security. If you did make it to 65, you drew on Social Security for only a few years until you died! You see, Social Security was never intended to be a retirement program. It was merely insurance against living too long.
But then, something happened that would change Social Security forever. Soldiers came home from World War II and started to do something at a rate at which they’d never done before. They started making babies! Great, you may be thinking. More babies equals more workers, which mean more contributions to the Social Security program. That would be true if these “Baby Boomers” had decided to have nearly as many children as their parents did, but they didn’t. They had 32 million fewer children. And this is where the math to which David Walker refers catches up with us.
Today, there are no longer 42 people contributing to Social Security for every one person who takes money out of the program. The ratio has fallen to 3 to 1.*1 And in another 10 years, it’s going to be closer to 2 to 1. Compounding the problem, Americans can now draw Social Security as early as 62 and, due to advancements in science and medical technology, retirees are living longer than ever. The reality is, if you start drawing on Social Security at 62, you’ll keep drawing it, on average, until age 85. In fact, octogenarians are the fastest-growing segment of our population!