The Power of Zero: [Book and tax planning for retirement]

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joer1212
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The Power of Zero: [Book and tax planning for retirement]

Post by joer1212 » Fri Aug 29, 2014 1:56 pm

I just finished reading The Power Of Zero by David McKnight.

The author makes a compelling, though somewhat controversial, case for being in the 0% tax bracket upon retirement. He claims that taxes are likely to skyrocket by the early 2020's because of government shortfalls, and that now is a good time to plan for this grim future by tactically allocating your assets to minimize or eliminate taxes. He backs his claims with statistics, graphs, and statements by the former Comptroller General of the United States, David M. Walker, among others.

Basically, the author's strategy boils down to this:

There are 3 "tax buckets": taxable, tax-deferred, and tax-free.

Taxable
This is your "emergency fund". It should contain no more than 6 months' income.

Tax Deferred
This is money in your IRA, 401(k), 457(b), etc. You should have enough funds in these accounts (but no more) so that your Required Minimum Distribution upon retirement equals your Standard Deduction and Personal Exemption, making these distributions tax-free.

Tax-Free
This is where the lion's share of your money should be because they have no tax impact whatsoever (including not being counted as "provisional income" that may cause a portion of your Social Security to become taxable). These include Roth IRA's, Roth 401(k)'s, and LIRP's (Life Insurance Retirement Plans).

I was intrigued with this book....until the author recommended to place most of my assets in a LIRP. That's when my skepticism meter went into overdrive (and, surprise! surprise! David McKnight is in the business of selling this product).
By his own admission, the lowest net fees you can reasonably expect to pay for a LIRP is about 1.5%, and that's after you go to extremes. In addition, you would obviously have to pay for the cost of life insurance/long-term care, which, if you're single and childless like I am, you do not need.

Now, I'm not posting to discredit this author's strategy. I just want some educated opinions. How would this strategy compare to paying exorbitant tax rates in retirement, should Mr. McKnight's predictions come true? (I know this question is vague and generalized, but perhaps you can come up with some hypothetical examples?)

Also, I have a Roth 401K at my job, which allows me to contribute up to $17,500/yr. Should I divert my regular 401(K) contributions to this account, in light of what I've read in this book?

Personal Info:
* I will be 45 next month
* I plan on taking an early retirement by 52
* I'll probably have around 1million USD
* I live an extremely frugal lifestyle, so I plan on only withdrawing about 20K/yr from my various accounts (increasing distributions with inflation)
Last edited by joer1212 on Fri Dec 12, 2014 2:00 pm, edited 3 times in total.

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Re: The Power of Zero: Controversial New Book About Taxes

Post by technovelist » Fri Aug 29, 2014 1:59 pm

I can already see one other very obvious flaw in his plan: whatever he tells you to do to eliminate taxes may be itself eliminated by changes in tax laws.

And I agree that the sales pitch for life insurance is very suspect as well.
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Re: The Power of Zero: Controversial New Book About Taxes

Post by letsgobobby » Fri Aug 29, 2014 2:01 pm

Sure, if my tax rate is 100% in retirement then perhaps this shill, er, author's recommendation will have been proven correct.

For now I will choose 0.05% ERs and a taxable investment over 1.5% ERs in life insurance at this time, thank you very much.

Fortunately there are intermediate options. 529s come to mind, as I've posted about extensively. 0.05% expense ratios AND tax-deferred and probably tax free. HSAs are another for instance.

However I reserve the right to examine continually the current tax environment to determine my optimal strategy. I doubt life insurance will ever be a part of that.

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Re: The Power of Zero: Controversial New Book About Taxes

Post by joer1212 » Fri Aug 29, 2014 2:03 pm

technovelist wrote:I can already see one other very obvious flaw in his plan: whatever he tells you to do to eliminate taxes may be itself eliminated by changes in tax laws.

And I agree that the sales pitch for life insurance is very suspect as well.
The author admits this is possible, but says that it's more likely that the old rules for tax-free accounts will be grandfathered for those already invested in them.

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Re: The Power of Zero: Controversial New Book About Taxes

Post by technovelist » Fri Aug 29, 2014 2:10 pm

joer1212 wrote:
technovelist wrote:I can already see one other very obvious flaw in his plan: whatever he tells you to do to eliminate taxes may be itself eliminated by changes in tax laws.

And I agree that the sales pitch for life insurance is very suspect as well.
The author admits this is possible, but says that it's more likely that the old rules for tax-free accounts will be grandfathered for those already invested in them.
I don't see how he could possibly know that.
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Re: The Power of Zero: Controversial New Book About Taxes

Post by Steelersfan » Fri Aug 29, 2014 2:12 pm

Books and TV shows that predict the apocalypse is coming are a good way to make money from a certain audience for creator of the material.

For the rest of us - stay the course.

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Re: The Power of Zero: Controversial New Book About Taxes

Post by livesoft » Fri Aug 29, 2014 2:13 pm

Here is a thread on how to pay ZERO taxes in retirement and the tricks do not involve LIRP:
http://www.bogleheads.org/forum/viewtopic.php?t=87471

Basically, one converts tax-deferred assets to tax-free assets while in the 0% tax bracket. This reduces future RMDs and gives one lots of tax-free assets. Also note that long-term capital gains and qualified dividends are tax-free for many folks. Your job is to be one of those folks.
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Re: The Power of Zero: Controversial New Book About Taxes

Post by ulrichw » Fri Aug 29, 2014 2:26 pm

joer1212 wrote:
technovelist wrote:I can already see one other very obvious flaw in his plan: whatever he tells you to do to eliminate taxes may be itself eliminated by changes in tax laws.

And I agree that the sales pitch for life insurance is very suspect as well.
The author admits this is possible, but says that it's more likely that the old rules for tax-free accounts will be grandfathered for those already invested in them.
So basically he's saying "taxes will sky-rocket" - meaning that tax laws are probably going to be substantially changed - but all of the stuff he's pitching will remain static? Doesn't seem to pass the sniff test to me.

If the (somewhat debatable) premise is true, and tax rates do change, I believe that multi-millionaires (net worth) paying 0 taxes might be a prime target.

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Re: The Power of Zero: Controversial New Book About Taxes

Post by segfault » Fri Aug 29, 2014 2:29 pm

+1 what livesoft said. Taxable investing can be quite tax efficient. Even selling a taxable investment may not result in a huge realized gain, especially if it's a mutual fund which has distributed a lot of its gains along the way.

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Re: The Power of Zero: Controversial New Book About Taxes

Post by grabiner » Fri Aug 29, 2014 5:33 pm

The other risk is that tax laws might change in a different way. Suppose that taxes are raised by keeping the income tax unchanged but adding a value-added tax. Now, you will pay the value-added tax on anything you spend out of any account, so there is no change to the preference between accounts; you lost out by paying 25% tax on a Roth 401(k) while working on money which could have been withdrawn from a traditional 401(k) with a 15% tax rate.

I do prefer Roth accounts over traditional accounts if the expected tax rates are equal, because the Roth has less risk that the tax rate will change (either because of a change in tax laws, or because your income puts you in a different tax bracket). But this is a two-sided risk; your tax rate could rise or fall, so it isn't worth paying a lot of money to protect against the risk that it will change.
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Re: The Power of Zero: Controversial New Book About Taxes

Post by hoppy08520 » Fri Aug 29, 2014 6:16 pm

Yawn.

Follow the money. This book is a veiled advertisement for the author's insurance products. It's all a setup to strike fear in people so they'll buy his garbage.

Just read this below from an insurance industry website. It's a pitch to insurance sales people to sign up for David McKnight's program so they can make more sales. I underlined the good parts.

http://www.figmarketing.com/marketing-p ... chise.aspx
What is the Franchise?

How do you produce a million dollars of life insurance premium in a year? You find someone who's already doing it, and you copy everything he does!

David McKnight has spent the last 15 years developing his proprietary million dollar life insurance marketing program. Today, his schedule is booked 12 months in advance and he hasn't made a phone call in over 3 years. And here's the best part. He wants to show you exactly how he does it.

At the heart of David's marketing strategy is a proprietary workshop presentation geared towards the tax-free retirement market. This exclusive workshop educates attendees on the power of rearranging highly taxable assets into tax-free vehicles that protect them from the impact of rising taxes. This balanced approach to tax-free retirement focuses on the importance of Roth IRA's, Roth Conversions and yes, you guessed it, permanent life insurance. Through the power of his presentation, David gets 80% of his attendees to sign up for individual consultations.

As anyone will tell you, workshops work the best when they are well-attended. The second component of David's million dollar marketing plan focuses on how to get prospects in the room. Over his career, David has perfected a marketing formula that turns traditional prospecting on its ear. He conducts retirement education courses at local colleges and universities where pre-qualified attendees actually pay to show up [the readers of his books]. This proven system has given him the perfect low-pressure venue within which to discuss the power of his tax-free retirement strategies. As a result of these workshops, David consistently holds between 15 and 20 appointments per week. And because attendees are encouraged to sign up for consultations at the end of the class, no prospecting calls are required.

When you couple an extraordinary workshop presentation with an extraordinary prospecting mechanism, you get million dollar results. Most importantly, everything that David does can be duplicated, and he's willing to show you how.
As you can read above, McKnight promises these salespeople that they can make all this additional income by using his program. Where do you think all this income to the salesman comes from? It comes from the gullible readers of The Power of Zero: Controversial New Book About Taxes. Essentially, McKnight's books lines up prospects for the insurance salespeople to exploit and sell to.

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Re: The Power of Zero: Controversial New Book About Taxes

Post by Steelersfan » Fri Aug 29, 2014 7:39 pm

You mean...you mean......

David is exploiting people's fears of an uncertain future to make a bundle of money for himself today?

No way!!!!!!! :annoyed

I wonder if he's bought his yacht yet?

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Re: The Power of Zero: Controversial New Book About Taxes

Post by Alex Frakt » Fri Aug 29, 2014 8:36 pm

Moved to the Investing - Theory, News & General subforum since most of the original post and replies are about the book, not the OP's personal investment question. Perhaps, the OP could post a new thread in Investing - Help with Personal Investments when he feels this issue has been addressed to his satisfaction?

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Re: The Power of Zero: Controversial New Book About Taxes

Post by Ged » Fri Aug 29, 2014 8:42 pm

Most of the reviews of this book on Amazon are done by friends and associates of the author of this book. Few of the reviewers have more than one review.

IMHO this is a borderline scam

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Re: The Power of Zero: Controversial New Book About Taxes

Post by hoppy08520 » Fri Aug 29, 2014 9:12 pm

Joe, regarding your own scenario, you look like the perfect candidate for traditional 401(k) contributions, not Roth. If you retire early at age 52, you'll have 18 (!) years before Social Security (assuming you start at age 70) and RMD during which you can do Roth conversions at no/low taxes due to your low/no income during those years. So tell me again why you're so eager to pay your taxes now when you probably won't have to later?

I'm being very unselfish in telling you this, because for my own good I'd rather you pay a lot of taxes now so my taxes don't skyrocket as much as predicted by McKnight.

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Re: The Power of Zero: Controversial New Book About Taxes

Post by White Coat Investor » Fri Aug 29, 2014 9:45 pm

Although I didn't mention the book or author by name (we're actually kind of related), I reviewed this concept recently on the blog:

http://whitecoatinvestor.com/is-a-zero- ... good-idea/
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Re: The Power of Zero: Controversial New Book About Taxes

Post by joer1212 » Sat Aug 30, 2014 1:51 am

hoppy08520 wrote:Yawn.

Follow the money. This book is a veiled advertisement for the author's insurance products. It's all a setup to strike fear in people so they'll buy his garbage.

Just read this below from an insurance industry website. It's a pitch to insurance sales people to sign up for David McKnight's program so they can make more sales. I underlined the good parts.

http://www.figmarketing.com/marketing-p ... chise.aspx
What is the Franchise?

How do you produce a million dollars of life insurance premium in a year? You find someone who's already doing it, and you copy everything he does!

David McKnight has spent the last 15 years developing his proprietary million dollar life insurance marketing program. Today, his schedule is booked 12 months in advance and he hasn't made a phone call in over 3 years. And here's the best part. He wants to show you exactly how he does it.

At the heart of David's marketing strategy is a proprietary workshop presentation geared towards the tax-free retirement market. This exclusive workshop educates attendees on the power of rearranging highly taxable assets into tax-free vehicles that protect them from the impact of rising taxes. This balanced approach to tax-free retirement focuses on the importance of Roth IRA's, Roth Conversions and yes, you guessed it, permanent life insurance. Through the power of his presentation, David gets 80% of his attendees to sign up for individual consultations.

As anyone will tell you, workshops work the best when they are well-attended. The second component of David's million dollar marketing plan focuses on how to get prospects in the room. Over his career, David has perfected a marketing formula that turns traditional prospecting on its ear. He conducts retirement education courses at local colleges and universities where pre-qualified attendees actually pay to show up [the readers of his books]. This proven system has given him the perfect low-pressure venue within which to discuss the power of his tax-free retirement strategies. As a result of these workshops, David consistently holds between 15 and 20 appointments per week. And because attendees are encouraged to sign up for consultations at the end of the class, no prospecting calls are required.

When you couple an extraordinary workshop presentation with an extraordinary prospecting mechanism, you get million dollar results. Most importantly, everything that David does can be duplicated, and he's willing to show you how.
As you can read above, McKnight promises these salespeople that they can make all this additional income by using his program. Where do you think all this income to the salesman comes from? It comes from the gullible readers of The Power of Zero: Controversial New Book About Taxes. Essentially, McKnight's books lines up prospects for the insurance salespeople to exploit and sell to.
This is enlightening. Thankfully, I wouldn't have to purchase LIRP's, even if I decided to follow McKnight's advice. I have a Roth 401K. The question is whether or not I should contribute to it.

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Re: The Power of Zero: Controversial New Book About Taxes

Post by joer1212 » Sat Aug 30, 2014 2:22 am

hoppy08520 wrote:Joe, regarding your own scenario, you look like the perfect candidate for traditional 401(k) contributions, not Roth. If you retire early at age 52, you'll have 18 (!) years before Social Security (assuming you start at age 70) and RMD during which you can do Roth conversions at no/low taxes due to your low/no income during those years. So tell me again why you're so eager to pay your taxes now when you probably won't have to later?
I plan on taking Social Security at age 62 (as well as my pension). This means that I will only have to cover 10 years of my retirement using exclusively my own funds (age 52-62).
However, by age 70 1/2 (assuming the law remains the same), I will be required to withdraw 3.65% annually from my tax-deferred accounts (not 2%, which, by then, I will have been doing for 18 years). The question is, will these distributions from my tax-deferred accounts, in addition to my small pension be enough provisional income to cause my Social Security to be taxed? This is an excellent point that author David McKnight brings up in his book. Nothing exists in isolation. Everything affects everything else.
You also bring up a great point about doing annual Roth conversions when I am in a lower tax bracket during retirement. The trouble is that I will have a mere 10 years to do this, not 18.
I'm being very unselfish in telling you this, because for my own good I'd rather you pay a lot of taxes now so my taxes don't skyrocket as much as predicted by McKnight.
:D
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Re: The Power of Zero: Controversial New Book About Taxes

Post by joer1212 » Sat Aug 30, 2014 2:44 am

EmergDoc wrote:Although I didn't mention the book or author by name (we're actually kind of related), I reviewed this concept recently on the blog:

http://whitecoatinvestor.com/is-a-zero- ... good-idea/
I did a little research on my own right after reading this book (and before posting here). The article you shared was one of the things I had read.

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Re: The Power of Zero: Controversial New Book About Taxes

Post by strafe » Sat Aug 30, 2014 7:04 am

"Tax free" is a bit misleading as it only applies to income tax. The consumption of all of these savings vehicles would still be subject to sales or value-added tax (VAT).

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Re: The Power of Zero: Controversial New Book About Taxes

Post by Tigermoose » Sat Aug 30, 2014 7:10 am

Wouldn't politicians rather choose the hidden tax method -- i.e. inflation -- rather than outright taxes? That seems rather more likely to me.
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Re: The Power of Zero: Controversial New Book About Taxes

Post by grabiner » Sat Aug 30, 2014 10:30 am

joer1212 wrote:I plan on taking Social Security at age 62 (as well as my pension). This means that I will only have to cover 10 years of my retirement using exclusively my own funds (age 52-62).
However, by age 70 1/2 (assuming the law remains the same), I will be required to withdraw 3.65% annually from my tax-deferred accounts (not 2%, which, by then, I will have been doing for 18 years).
This suggests that you should convert part of your IRA to a Roth IRA, in order to reduce the RMDs that you don't need. Normally, if you expect to retire in the same tax bracket, it is break-even to convert if you pay taxes with funds from the IRA (or funds that would have otherwise been contributed to a retirement account). But if the conversion allows you to avoid moving money from an IRA to a taxable investment in the future, you come out ahead by getting more tax-deferred growth.

And you can delay taking SS until age 70; this will give you more time to do conversions, and allow you to deplete the IRA faster at ages 62-70, reducing the RMDs after age 70 which cause SS to be taxed at a higher rate.

But don't go overboard. Right now, you are at your earnings peak; it's not worth paying 25% tax to contribute to a Roth 401(k) in order to avoid paying 15% tax on RMDs from the money later.
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Re: The Power of Zero: Controversial New Book About Taxes

Post by bberris » Sat Aug 30, 2014 12:04 pm

Tigermoose wrote:Wouldn't politicians rather choose the hidden tax method -- i.e. inflation -- rather than outright taxes? That seems rather more likely to me.
Inflation is like a tax on savers because it reduces their spending power. But it's not a tax on everyone. It's a benefit for debtors. Since every dollar is a debt, its an overall wash.

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Re: The Power of Zero: Controversial New Book About Taxes

Post by joer1212 » Sat Aug 30, 2014 3:30 pm

grabiner wrote:
joer1212 wrote:I plan on taking Social Security at age 62 (as well as my pension). This means that I will only have to cover 10 years of my retirement using exclusively my own funds (age 52-62).
However, by age 70 1/2 (assuming the law remains the same), I will be required to withdraw 3.65% annually from my tax-deferred accounts (not 2%, which, by then, I will have been doing for 18 years).
This suggests that you should convert part of your IRA to a Roth IRA, in order to reduce the RMDs that you don't need. Normally, if you expect to retire in the same tax bracket, it is break-even to convert if you pay taxes with funds from the IRA (or funds that would have otherwise been contributed to a retirement account). But if the conversion allows you to avoid moving money from an IRA to a taxable investment in the future, you come out ahead by getting more tax-deferred growth.

And you can delay taking SS until age 70; this will give you more time to do conversions, and allow you to deplete the IRA faster at ages 62-70, reducing the RMDs after age 70 which cause SS to be taxed at a higher rate.

But don't go overboard. Right now, you are at your earnings peak; it's not worth paying 25% tax to contribute to a Roth 401(k) in order to avoid paying 15% tax on RMDs from the money later.
Makes sense under normal circumstances. However, I was wondering if it would ever make sense to move money into a LIRP. For example, if you're retired, and you get a windfall, where would you place this money for maximum tax efficiency?
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Re: The Power of Zero: Controversial New Book About Taxes

Post by Jack » Sat Aug 30, 2014 4:00 pm

joer1212 wrote:He backs his claims with statistics, graphs, and statements by the former Comptroller General of the United States, David M. Walker, among others.
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Re: The Power of Zero: Controversial New Book About Taxes

Post by livesoft » Sat Aug 30, 2014 4:06 pm

joer1212 wrote:Makes sense under normal circumstances. However, I was wondering if it would it ever make sense to move money into a LIRP. For example, if you're retired, and you get a windfall, where would you place this money for maximum tax efficiency?
Is there something wrong with a tax-exempt bond fund? If you wanted to pay 0.25% of the windfall in taxes every year, then one could invest in a total stock market index fund. While 0.25% is not maximum efficiency, it is pretty darn efficient.

I don't see how or why LIRP is even on the radar for this problem … because it is not a problem.
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Re: The Power of Zero: Controversial New Book About Taxes

Post by grabiner » Sat Aug 30, 2014 4:25 pm

livesoft wrote:
joer1212 wrote:Makes sense under normal circumstances. However, I was wondering if it would it ever make sense to move money into a LIRP. For example, if you're retired, and you get a windfall, where would you place this money for maximum tax efficiency?
Is there something wrong with a tax-exempt bond fund? If you wanted to pay 0.25% of the windfall in taxes every year, then one could invest in a total stock market index fund. While 0.25% is not maximum efficiency, it is pretty darn efficient.
At current yields, you will lose 0.28% annually to takes on Total Stock Market Admiral shares (15% tax on 1.84% yield, almost all qualified dividends), plus 15% of your capital gains when you sell, likely about another 0.3% annually over a long time period. If Intermediate-Term Tax-Exempt Admiral shares at 1.74% are priced to break even with taxable bonds of the same risk level in a 25% tax bracket, the effective tax cost is 0.58% annually. So you expect to lose 0.58% of your portfolio to taxes, and 0.05% for the stocks, 0.12% for the bonds, to expenses. That is still pretty efficient, both for taxes and for total costs. Most ways of sheltering the investment from taxes will cost more than the 0.58%. (For example, a Vanguard variable annuity holding Total Bond Market Index has an expense ratio of 0.49%, and taxes are only deferred, not eliminated; you pay tax on gains at your full tax rate.)
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Re: The Power of Zero: Controversial New Book About Taxes

Post by Sagenick48 » Sat Aug 30, 2014 4:48 pm

This raised to me an interesting question, what is the best lifetime tax strategy?

Do you pay taxes say at 25% marginal during you working years, and buy investment products charging 1.5% fees per annum to pay 0% taxes in retirement?

Or do you pay .1% fees, invest in Index funds, and then pay marginal rates of say 28% (federal) in retirement on your RMDs?

What if your marginal rates in retirement are 50% (easily obtained when you consider taxation of SSI, Medicare surcharge, ACA tax on investment income, AMT, state income taxes)?

What is the best long term tax planning.

My gut tells me the best is to aim for the same rate before and after retirement.
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Re: The Power of Zero: Controversial New Book About Taxes

Post by livesoft » Sat Aug 30, 2014 5:04 pm

You defer as much as you can and pay low taxes while working. Then you retire early and pay no taxes on Roth conversions. Then when you start receiving SS, you pay no taxes because by that time you only have Roth IRAs. With such a strategy, you will come no where close to paying ACA tax on investment income nor AMT.

So your money was income tax-free going into the tax-deferred accounts and income-tax-free coming out. So I agree with you: The best strategy is to aim for the same rate while working and while in retirement as long as the rate is zero.

Of course, it goes without saying that you never pay state income tax.
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Re: The Power of Zero: Controversial New Book About Taxes

Post by Epsilon Delta » Sat Aug 30, 2014 6:22 pm

livesoft wrote:You defer as much as you can and pay low taxes while working. Then you retire early and pay no taxes on Roth conversions. Then when you start receiving SS, you pay no taxes because by that time you only have Roth IRAs. With such a strategy, you will come no where close to paying ACA tax on investment income nor AMT.
This implies that your net worth is only a few hundred thousand. It's not the same as "Never earn any money" but it's definitely related.

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Re: The Power of Zero: Controversial New Book About Taxes

Post by letsgobobby » Sat Aug 30, 2014 6:39 pm

Right if you only have 8 years of no income (63-71) and can only convert up to $20k per year at no taxes, that's an IRA of under $200k.

More realistically a lot of Bogleheads will struggle to stay under the 15% bracket in those early retirement years, and have to make the difficult decision as to whether to convert IRA to Roth IRA at 15% or realize taxable gains at 0%. Some may depend on whether you plan to leave a legacy: a taxable inheritance receives a step up in basis and is therefore tax free to heirs (if not subject to estate tax) so in that case converting the IRA may be more appealing. Alternatively if you plan to leave the IRA to charity then definitely don't convert it, which is only paying taxes when eventually none will be due.

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Re: The Power of Zero: Controversial New Book About Taxes

Post by livesoft » Sat Aug 30, 2014 6:45 pm

letsgobobby wrote:Right if you only have 8 years of no income (63-71) and can only convert up to $20k per year at no taxes, that's an IRA of under $200k.
I calculated a conversion of something like $68K a year in some cases with no tax. Get some spouse, kids, etc. and really do this right.

The reality is that one who retires early won't have time to save up a large tax-deferred account, so they will have a large taxable account, too. And return of capital is tax-free.
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Re: The Power of Zero: Controversial New Book About Taxes

Post by Epsilon Delta » Sat Aug 30, 2014 7:26 pm

livesoft wrote:
letsgobobby wrote:Right if you only have 8 years of no income (63-71) and can only convert up to $20k per year at no taxes, that's an IRA of under $200k.
I calculated a conversion of something like $68K a year in some cases with no tax. Get some spouse, kids, etc. and really do this right.
$20k already includes the wife. If you add kids you have to feed the kids. Child protective services gets funny about that. :twisted: Same for all the other deductions - they require spending money.

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Re: The Power of Zero: Controversial New Book About Taxes

Post by dodecahedron » Sat Aug 30, 2014 7:56 pm

livesoft wrote:You defer as much as you can and pay low taxes while working. Then you retire early and pay no taxes on Roth conversions. Then when you start receiving SS, you pay no taxes because by that time you only have Roth IRAs. With such a strategy, you will come no where close to paying ACA tax on investment income nor AMT.

So your money was income tax-free going into the tax-deferred accounts and income-tax-free coming out. So I agree with you: The best strategy is to aim for the same rate while working and while in retirement as long as the rate is zero.

Of course, it goes without saying that you never pay state income tax.
Alternatively, you work part-time indefinitely in a job you love so you defer RMDs indefinitely and can continue to very gradually and opportunistically Rothify your traditional accounts while continuing to contribute to them indefinitely. If you get to the point where you are disabled to the point of needing long-term care, you leave your job and give instructions to your POA to draw on the large remaining reservoir of traditional retirement funds to pay for your long-term care needs (because the large medical deductions will neutralize the tax effects.) You designate a charity and/or an heir you expect to be in a low tax bracket as the beneficiary of any residual funds in your traditional retirement account.

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Re: The Power of Zero: Controversial New Book About Taxes

Post by wshang » Sat Aug 30, 2014 10:16 pm

There are a couple of details the OP should pay attention if 401k or tIRA is large:

1) Attempt to leave a job where the 401k resides at age 55 to take an distribution. Consider a Essentially Equal 401(k) Distributions before age 59.5.
2) Convert as much in the 15% bracket before age 70 to Roth
3) Try to find a minimally taxing, job where you can put your 401k at age 70 where you qualify - to defer RMD.
4) Fill some of the 401k to exclude the value of this qualified longevity annuity contract (QLAC) from the account balance used to calculate RMDs
5) Live in a state where pensions are taxed lightly if not at all
6) Employ yourself and learn about what you can deduct as business expenese
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Re: The Power of Zero: Controversial New Book About Taxes

Post by Ninegrams » Sat Aug 30, 2014 10:54 pm

livesoft wrote:
Of course, it goes without saying that you never pay state income tax.

Please clarify this statement. Naturally I would prefer not to pay state taxes, are you saying if I live in a state that taxes ( regardless of the rate ) my income that I should by default not even consider converting an IRA?

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Re: The Power of Zero: Controversial New Book About Taxes

Post by livesoft » Sat Aug 30, 2014 11:11 pm

No, I'm saying you should not live in a state that taxes your income if you do not wish to pay state income taxes.
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Re: The Power of Zero: Controversial New Book About Taxes

Post by DonCamillo » Sat Aug 30, 2014 11:22 pm

Sagenick48 wrote:This raised to me an interesting question, what is the best lifetime tax strategy?
The best lifetime tax strategy requires a time machine. You will have to visit the future (probably many different times) and discover how much you will earn each year, what changes will be made to the tax laws, when you will retire, what important deductible expenses (mostly major medical) you will have at what times, what real estate, stocks and bonds will do for the rest of your life, and when you will die, among other things.

Being forced to retire early, whether by your employer or disability, or deciding to work longer than you originally planned, is just one of many factors that could make major changes in the optimum tax strategy.

I remember planning for retirement using the projections in my Social Security statements in the 1980s. I didn't know that Congress was going to reduce my benefits dramatically by changing the retirement age, changing the COLA formula, and making 85% of my benefits taxable.

I planned my retirement based on the formula for the defined benefit plan at AT&T when I worked there. They replaced it with a cash value plan and froze new benefits.

Here is just one possible scenario. You somehow manage to come up with the perfect tax strategy for the day before you retire. The next day, Congress eliminates the income tax and replaces it with a value added tax. What happens to your perfect strategy?
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Re: The Power of Zero: Controversial New Book About Taxes

Post by Ninegrams » Sun Aug 31, 2014 11:11 am

livesoft wrote:No, I'm saying you should not live in a state that taxes your income if you do not wish to pay state income taxes.
Too late, I'm already committed to go the distance in my current state. :D

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Re: The Power of Zero: Controversial New Book About Taxes

Post by dodecahedron » Sun Aug 31, 2014 12:25 pm

livesoft wrote:No, I'm saying you should not live in a state that taxes your income if you do not wish to pay state income taxes.
State income taxes are only one piece of the big puzzle.

State income taxes in my state (NY) are a bargain for seniors, since all Social Security and Fed/NY/local govt pensions are completely exempt from taxes as is the first $20K of private pension or IRA withdrawals. What is not a bargain are the property taxes! And sales taxes and/or excise taxes can be bad.

I don't mind my state income taxes at all--they are a tiny pittance compared to my property tax bill My sales taxes are also pretty low since I am not a big spender (and save a good chunk of my income) and much of what I do buy (groceries, services of professionals) is not subject to sales tax.

My property tax far exceeds what I paid in all other taxes last year (income, sales, excise, estate). Sigh. I know I could reduce it a lot by downsizing but I have so many memories and the emotional energy of moving is just too much to contemplate. At least it is tax deductible! And I am challenging my assessment (based on an appraisal I had to have done for the estate filing.)

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Re: The Power of Zero: [Book and tax planning for retirement

Post by Phineas J. Whoopee » Sun Aug 31, 2014 12:53 pm

I have two comments based on the OP I've not seen in the other responses.

1) As foolish as it is to choose one's investments to express one's political opinion, it's still worse to choose them to express somebody else's political opinion.

2) I suppose it may turn out that tax revenue needs to increase, but if the economy improves it will do so on its own, without tax law changes. I'm presuming this comment is acceptable here because it's based on the existing code, not on any potential future legislation.

PJW

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Re: The Power of Zero: Controversial New Book About Taxes

Post by joer1212 » Sun Aug 31, 2014 1:57 pm

livesoft wrote:
joer1212 wrote:Makes sense under normal circumstances. However, I was wondering if it would it ever make sense to move money into a LIRP. For example, if you're retired, and you get a windfall, where would you place this money for maximum tax efficiency?
Is there something wrong with a tax-exempt bond fund? If you wanted to pay 0.25% of the windfall in taxes every year, then one could invest in a total stock market index fund. While 0.25% is not maximum efficiency, it is pretty darn efficient.

I don't see how or why LIRP is even on the radar for this problem … because it is not a problem.
Tax-exempt bond funds have low returns. I'd be solving one problem and creating another.
Also, any distributions from bond funds or tax-efficient stock funds would count as "provisional income". This could cause my Social Security benefits to become taxable.

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Re: The Power of Zero: Controversial New Book About Taxes

Post by grabiner » Sun Aug 31, 2014 2:01 pm

joer1212 wrote:Tax-exempt bond funds have low returns. I'd be solving one problem and creating another.
Also, any distributions from bond funds or tax-efficient stock funds would count as "provisional income". This could cause my Social Security benefits to become taxable.
And so would distributions from tax-exempt bond funds; therefore, it doesn't make sense to hold tax-exempt bonds in a 15% tax bracket, even in retirement. In most of the Social Security phase-in, $1 of extra income makes 85 cents of Social Security taxable, which gives a marginal tax rate of 12.75% on municipal bonds, qualified dividends, and capital gains, and 27.75% or ordinary income. (If you are in the 25% tax bracket, you will likely be beyond the phase-in and paying tax on 85% of Social Security, so any additional income will be taxed at your ordinary marginal rate.)
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Re: The Power of Zero: Controversial New Book About Taxes

Post by freddie » Sun Aug 31, 2014 3:13 pm

joer1212 wrote:
livesoft wrote:
joer1212 wrote:Makes sense under normal circumstances. However, I was wondering if it would it ever make sense to move money into a LIRP. For example, if you're retired, and you get a windfall, where would you place this money for maximum tax efficiency?
Is there something wrong with a tax-exempt bond fund? If you wanted to pay 0.25% of the windfall in taxes every year, then one could invest in a total stock market index fund. While 0.25% is not maximum efficiency, it is pretty darn efficient.

I don't see how or why LIRP is even on the radar for this problem … because it is not a problem.
Tax-exempt bond funds have low returns. I'd be solving one problem and creating another.
Also, any distributions from bond funds or tax-efficient stock funds would count as "provisional income". This could cause my Social Security benefits to become taxable.

Well right now my tax exempt bond funds have higher returns than my taxable for about the same duration. I don't know what that says about peoples opinion of my states economic situation:) But yep in general all of this tax stuff will cost you money.

Here is a question. Would you rather pay 15k/yr to a private company (1.5% of 1 million) and pay 0 dollars in income tax or would you rather pay ~7k/yr in income taxes (i.e. what you would pay on 20k of SS and 40k of IRA distribution as a single person. This is a worst case where your generating 3x as much money as you say you need. Your taxes will be a lot less with any LTGC and ROTH distributions)? In the second case your paying a lot more in taxes. You also have a lot more money and your taxes would need to double for it to make sense.

Contributing to a ROTH ira tends to be a poor choice for people retiring soon if they are paying any type of taxes. You are better off waiting and doing a rollover. You will likely be paying a lower average tax rate AND have the ability to undo the transaction if the investment falls in value in the ~22 months after you do the rollover.

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Re: The Power of Zero: Controversial New Book About Taxes

Post by joer1212 » Sun Aug 31, 2014 3:41 pm

livesoft wrote:You defer as much as you can and pay low taxes while working. Then you retire early and pay no taxes on Roth conversions. Then when you start receiving SS, you pay no taxes because by that time you only have Roth IRAs. With such a strategy, you will come no where close to paying ACA tax on investment income nor AMT.

So your money was income tax-free going into the tax-deferred accounts and income-tax-free coming out. So I agree with you: The best strategy is to aim for the same rate while working and while in retirement as long as the rate is zero.

Of course, it goes without saying that you never pay state income tax.
I don't see how I would pay no taxes on Roth conversions when I retire early. Low taxes, maybe, but definitely not no taxes.
Let's say that I am 52 now, and I take an early retirement. Let's also say I have 1 million in assets. Most of these assets will be in tax-deferred and taxable accounts.
My standard deduction & personal exemption amounts to about 10k. I would still need another 8-10k to cover my living expenses, which would be taxable at a 10% marginal rate.
Now, add in Roth conversions and, depending on the annual amount, I could be looking at an even higher tax rate.

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Re: The Power of Zero: [Book and tax planning for retirement

Post by livesoft » Sun Aug 31, 2014 3:45 pm

If you sell some shares of an equity fund in your taxable account with a long-term capital gain, you get 2 kinds of money: (1) return of capital that is tax-free and (2) long-term capital gains which is taxed at 0% in low tax-brackets. Furthermore, if you have built up carryover net losses over the years (especially 2008-2009), then one can offset more capital gains and have mo' money that is tax-free.

All this was already explained in some detail in the ZERO taxes in retirement with 6-figure expenses thread. It is true that if you do not make plans, then you will be paying taxes.

And a post in that thread which eventually leads to a real-life tax return: http://www.bogleheads.org/forum/viewtop ... 5#p2075585
Last edited by livesoft on Sun Aug 31, 2014 3:51 pm, edited 1 time in total.
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Re: The Power of Zero: Controversial New Book About Taxes

Post by joer1212 » Sun Aug 31, 2014 3:50 pm

DonCamillo wrote:I remember planning for retirement using the projections in my Social Security statements in the 1980s. I didn't know that Congress was going to reduce my benefits dramatically by changing the retirement age, changing the COLA formula, and making 85% of my benefits taxable.
+1

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Re: The Power of Zero: Controversial New Book About Taxes

Post by joer1212 » Sun Aug 31, 2014 3:59 pm

wshang wrote:There are a couple of details the OP should pay attention if 401k or tIRA is large:

1) Attempt to leave a job where the 401k resides at age 55 to take an distribution. Consider a Essentially Equal 401(k) Distributions before age 59.5.
2) Convert as much in the 15% bracket before age 70 to Roth
3) Try to find a minimally taxing, job where you can put your 401k at age 70 where you qualify - to defer RMD.
4) Fill some of the 401k to exclude the value of this qualified longevity annuity contract (QLAC) from the account balance used to calculate RMDs
5) Live in a state where pensions are taxed lightly if not at all
6) Employ yourself and learn about what you can deduct as business expenese
I have considered doing #1 for some time. If I retire before age 55, I will be forced to use IRS 72(t) rule in order to avoid getting hit with a 10% tax penalty for early withdrawal. And 72(t) requires me to withdraw a lot more from my 401(k) than the 2% I would normally withdraw.

Agreed on #2, #5, #6.

I've thought about #3, but even working part-time doesn't really appeal to me.

Can you clarify #4?
Last edited by joer1212 on Mon Sep 01, 2014 3:45 pm, edited 2 times in total.

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Re: The Power of Zero: Controversial New Book About Taxes

Post by grabiner » Sun Aug 31, 2014 4:14 pm

freddie wrote:Well right now my tax exempt bond funds have higher returns than my taxable for about the same duration. I don't know what that says about peoples opinion of my states economic situation:) But yep in general all of this tax stuff will cost you money.
The returns of your municipal-bond funds are higher because muni yields have fallen more than corporate or Treasury yields. Vanguard Intermediate-Term Tax-Exempt has a one-year return of 8.65%

The yields of your muni funds are only higher than the yields of your taxable funds if your munis are much riskier. Current Vanguard yields (all Investor shares):

Intermediate-Term Treasury: 1.54%
Intermediate-Term Tax-Exempt: 1.66%
Total Bond Market Index: 1.92%, 60% government bonds
Intermediate-Term Investment-Grade: 2.49%

So munis are still much riskier than Treasuries, and Vanguard's munis are less risky than its corporate bonds; Intermediate-Term Investment-Grade would have the same yield as Intermediate-Term Tax-Exempt in a 33% tax bracket.
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Re: The Power of Zero: [Book and tax planning for retirement

Post by Leeraar » Sun Aug 31, 2014 4:55 pm

In many countries (and in some states) the emphasis is on consumption and wealth taxes (sales tax, property tax) rather than income tax.

Your optimum tax strategy depends on place and time. What will happen in the future is anyone's guess, but if your money is taxed when you spend it, it does not much matter where it came from.

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