David McKnight goes through his five cardinal rules for doing a Roth conversion.

The first principle is simple: don’t do a Roth conversion that bumps you into a tax bracket that gives you heartburn.

Not sure about what a heartburn-inducing tax bracket looks like? David shares a simple “rule of thumb” you can follow.

In your zeal to get your Roth conversion done before tax rates go up for good, don’t bump into the 32% tax bracket along the way.

The second cardinal rule ties into the almost certainty that Congress will extend the Trump tax cuts through 2033 – make sure to stretch your tax liability out between now and then!

There’s a strong likelihood that, once Trump’s second round of tax cuts expire, taxes will rise dramatically in 2034.

The reason for that? The trajectory of the national debt and over $200 trillion in unfunded obligations for Social Security, Medicare, and Medicaid.

The third principle is “Don’t lose your sleep over IRMAA (Income Related Monthly Adjusted Amount) during your Roth conversion period.”

Many people are reluctant to do Roth conversions because they don’t want their Medicare premiums to increase.

Remember: your premiums would only go up over the period in which you’re executing your Roth conversion strategy – that’s nine years or less…

David recommends having a “rip the band-aid off” approach when it comes to both IRMAA and Roth conversions.

Cardinal principle #4: whenever possible, pay the tax on your Roth conversion out of your taxable investments like a brokerage account or cash.

David sees six months of basic living expenses as the ideal balance in your taxable bucket.

The fifth and final cardinal rule is “know your ideal balance in your tax-deferred bucket before executing your Roth conversion strategy”.

David shares a good mathematical reason for not converting 100% of your IRA to Roth even if you think that your tax rate down the road is likely to be higher than it is today.

A cheat code to help you establish the ideal balance in your tax-deferred accounts: if you’re married, it’s about $400,000 (if you don’t have a pension or other sources of residual income).

Are you single? Then, it’s about half that amount.

Keep in mind that a lot will depend on how much Social Security you’re planning on receiving in retirement.

Over at DavidMcKnight.com you can find a calculator to help you with all of this.

Following these five principles will help insulate your money from higher taxes, pay less taxes along the way, and increase the likelihood that your money will last as long as you do.

Mentioned in this episode:

David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track

DavidMcKnight.com

DavidMcKnightBooks.com

PowerOfZero.com (free video series)

@mcknightandco on Twitter

@davidcmcknight on Instagram

David McKnight on YouTube

Get David's Tax-free Tool Kit at taxfreetoolkit.com

Wondering when you should start thinking about a Roth conversion? That’s exactly what David McKnight dives into in this episode of The Power of Zero Show.

The retirement valley is that dip in taxable income that happens after you retire but before RMDs kick in – at age 73 or 75, depending on your birth year.

David walks through an example: you’ve got $2 million in your IRA and want to convert all of it to Roth.

If you take action during that valley, you can convert more while staying in the 24% tax bracket the whole time.

Not taking action now? Think of 2035 as the year tax rates are set to jump!

Why? Because interest on unfunded promises like Social Security, Medicare, and Medicaid has to be paid somehow.

Intrigued by the idea of a Roth conversion? Just make sure you move your money slowly enough to avoid jumping into a painful tax bracket.

A Roth conversion helps protect you from tax rate risk – the chance that future taxes will be much higher than today’s.

Worried about a financial collapse? A recent Penn Wharton study points to 2040 as a year to watch.

Even raising taxes or cutting spending may not be enough to stop what’s coming…

David says 2035 will be a turning point.

He predicts tax rates then could look like they did in the 1960s, when the top rate hit a jaw-dropping 89%.

There are two big reasons to take advantage of the retirement income valley while you can.

David shares two smart strategies to help you boost your tax-free retirement plan, and make your savings last longer.

Mentioned in this episode:

David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track

DavidMcKnight.com

DavidMcKnightBooks.com

PowerOfZero.com (free video series)

@mcknightandco on Twitter

@davidcmcknight on Instagram

David McKnight on YouTube

Get David's Tax-free Tool Kit at taxfreetoolkit.com

Penn Wharton

David McKnight addresses the most efficient order in which to spend your assets in retirement.

Online programs and algorithms that forecast and run calculations related to your retirement assets suggest starting with your tax-deferred assets like 401(k)s or IRAs.

Such tools recommend spending down your tax-deferred assets now, when tax rates are low, and your tax-free assets later – when tax rates are likely to be higher than they are today.

Reminder: regardless of the distribution strategy you choose, it should aim to maximize the likelihood that your money lasts as long as you do.

David’s recommended strategy involves spending small slivers of each of your assets all in the same year.

In other words, instead of mowing through one asset class all at once and then moving on to the next, you spend a little from each asset over time.

There’s a scenario in which you could receive your Social Security 100% tax-free – this could extend the life of all your other resources by five to seven years.

David explains why you shouldn’t aim to spend down all your tax-deferred assets in the early years.

David touches upon using a Roth conversion as a strategy.

Roth IRAs, Roth 401(k)s, and tax-free Social Security (when you can keep your provisional income low enough) are other sources of tax-free income you may accumulate along the way.

David discusses why it may be better to take a more nuanced approach, rather than simply spending down your tax-deferred assets first and your tax-free assets later.

Mentioned in this episode:

David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track

DavidMcKnight.com

DavidMcKnightBooks.com

PowerOfZero.com (free video series)

@mcknightandco on Twitter

@davidcmcknight on Instagram

David McKnight on YouTube

Get David's Tax-free Tool Kit at taxfreetoolkit.com

Today’s episode of The Power of Zero Show looks at a recent podcast episode in which Suze Orman recommended having three to five years of living expenses in cash during retirement.

Experts have long debated the rate at which retirees can draw down their assets while maintaining a high likelihood of not running out of money before they die.

Since the early ‘90s, the gold standard for sustainable distributions has been the 4% Rule.

According to the 4% Rule, whether the market goes up or down, you can reliably withdraw 4% each year with high confidence that you won’t outlive your money.

David McKnight points out that Orman’s advice – keeping money in a volatility buffer account – is at odds with her stance on sustainable withdrawal rates.

For Suze Orman, you shouldn’t be taking 4% withdrawals from your retirement portfolio. Instead, she recommends a 3% distribution rate.

Studies show that if you withdraw only 3%, regardless of market conditions, you have a near 100% chance of never running out of money.

David believes that by promoting the 3% rule AND encouraging people to keep 3-5 years of living expenses in a savings account, Suze Orman is doing a disservice to her listeners.

The first problem with Orman’s advice is that, while she got the volatility buffer concept right, she failed to adjust her sustainable withdrawal rate accordingly.

Following Orman’s approach could result in massive loss of purchasing power by keeping a significant portion of your net worth in a low-yielding savings account over an extended period.

David explores whether there’s a “safe and productive” way to grow your money during retirement.

Cash value life insurance, specifically in the form of Indexed Universal Life (IUL), is a financial vehicle that protects against market loss and grows at a rate of 5-7% (net of fees) over time – within a tax-free environment.

David wraps up with some final words of advice for Suze Orman.

Mentioned in this episode:

David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track

DavidMcKnight.com

DavidMcKnightBooks.com

PowerOfZero.com (free video series)

@mcknightandco on Twitter

@davidcmcknight on Instagram

David McKnight on YouTube

Get David's Tax-free Tool Kit at taxfreetoolkit.com

Suze Orman’s Podcast

Today’s episode addresses five reasons why a Roth IRA is one of David KcKnight’s favorite tax-free investments.

Unlike other retirement accounts, Roth IRAs give you 100% liquidity on all contributions.

While David isn’t necessarily suggesting that you use your Roth IRA as an emergency fund, it’s nice to know that you won’t have to wait until age 59 ½ to be able to access those funds.

If you happen to take out your Roth IRA contributions, you can put that money back within 60 days as long as your Roth IRA was not involved in a rollover during the 12 months preceding the date of distribution.

Tax regrowth is a second reason why David is an advocate for Roth IRAs.

For David, going for a Roth IRA could be the right move if you believe that your tax bracket in retirement is likely to be higher than it is today.

The Penn Wharton School of Business recently said that if the U.S. doesn’t write its fiscal ship of state by 2040, no combination of raising taxes or reducing spending will prevent the financial collapse of the country.

Some experts are even predicting that tax rates could have to double in order to honor the nation’s massive financial obligations.

A third huge benefit of a Roth IRA is that whatever money you don’t spend during your lifetime passes to your heirs, 100% tax-free –though they’ll have to liquidate those dollars within 10 years.

Thinking about Roth IRAs? Just know that distributions from Roth IRAs don’t count as provisional income.

In other words, they don’t count against the thresholds that cause Social Security taxation.

David explains what can cause up to 85% of your Social Security to become taxable at your highest marginal tax bracket – leaving a huge hole in your Social Security.

David has done the math hundreds of times: when you pay tax on your Social Security, you run out of money five to seven years faster than people who don’t pay tax on their Social Security.

Finally, Roth IRAs are a tool worth leveraging for the fact that Roth IRA distributions don’t count as income-related monthly adjustment amount (also known as IRMAA).

That translates to distributions from your Roth IRAs not counting against the thresholds that cause your Medicare Part B and Part D premiums to go up.

David sees the Roth IRA as one of the crown jewels in the IRS tax code.

Mentioned in this episode:

David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track

DavidMcKnight.com

DavidMcKnightBooks.com

PowerOfZero.com (free video series)

@mcknightandco on Twitter

@davidcmcknight on Instagram

David McKnight on YouTube

Get David's Tax-free Tool Kit at taxfreetoolkit.com

Penn Wharton

This episode of The Power of Zero Show is part of David McKnight’s podcast interview with Caleb Guilliams and Tom Wall, PhD.

David touches upon a recent Ernst & Young study where whole life insurance was used as a buffer-type strategy.

When it comes to the “risk continuum”, David sees IUL as slightly on the right side of whole life insurance.

IUL is something worth doing only if you think that risk premium can get you a slightly higher rate of return over time.

David recognizes that IUL has risks but that, in exchange for those risks, you can get somewhat of a higher rate of return.

Whole life policies aren’t something David sees as designed to build money up and then take money out permanently.

One of the reasons why David likes the IUL is because you can find a carrier that gives you a guaranteed 0% loan.

Some may argue that Wade Pfau, who wrote the foreword for David’s latest book, The Guru Gap, prefers whole life instead of IUL.

David’s stated objective is to build up your net worth as effectively as you can.

His suggestion for the accumulation period is to save as well as you can and to mostly invest in stocks.

David explains his preference for IUL over whole life policies.

Mentioned in this episode:

David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track

DavidMcKnight.com

DavidMcKnightBooks.com

PowerOfZero.com (free video series)

@mcknightandco on Twitter

@davidcmcknight on Instagram

David McKnight on YouTube

Get David's Tax-free Tool Kit at taxfreetoolkit.com

Ernst & Young

Dave Ramsey

Wade Pfau

Today’s episode of The Power of Zero Show features part of David McKnight’s conversation with Caleb Guilliams and Tom Wall, PhD.

David kicks things off by addressing the liquidity issue.

Handing a chunk of your retirement savings over to an insurance company in exchange for a stream of income that’s guaranteed to last as long as you do sounds great in principle, but people often have consternation about it…

The thought of losing liquidity on a significant portion of their net worth is what prevents some Americans from opting for SPEAs and DIAAs.

David explains why a fixed index annuity can be a valuable resource to leverage.

David discusses what the annuity industry tends to do.

In his book, Tax-Free Income for Life, David illustrates the so-called “piecemeal” internal Roth conversion.

An internal Roth conversion allows you to convert your annuity into a Roth IRA – with an amount of your choosing and over a timeframe your financial plan calls for.

Tom Wall discusses the two phases of an annuity, the accumulation and distribution phases, as well as the repercussions of the perceived loss of liquidity.

Mentioned in this episode:

David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track

DavidMcKnight.com

DavidMcKnightBooks.com

PowerOfZero.com (free video series)

@mcknightandco on Twitter

@davidcmcknight on Instagram

David McKnight on YouTube

Get David's Tax-free Tool Kit at taxfreetoolkit.com