Book Power of Zero – Tax Free Retirement - David McKnight
Retire Richly - Tax Free Retirement Portfolio - Power of Zero - David McKnight - Woman Freedom
The book "The Power of Zero - How to Get to the 0% Tax Bracket and Transform Your Retirement” by David McKnight advocates reaching the 0% tax bracket for retirement finances to seek a tax free retirement, protect retirement portfolio and secure retirement income. McKnight argues strongly that taxes, including taxes on retirement income, are likely to rise significantly in the future. McKnight argues that traditional tax-deferred retirement accounts, such as 401(k)s and IRAs, are "low-hanging fruit" for the government, making them vulnerable to higher tax rates in the future. To reach a tax free retirement, McKnight introduces three fundamental "buckets" of money: taxable, tax-deferred, and tax-free. It analyzes the pros and cons of each, emphasizing the importance of strategic asset allocation, rather than merely focusing on rates of return on a retirement portfolio. McKnight notes that lower taxes may aid goals for financial independence retire early.
BOOKS BY DAVID MCKNIGHT - AUTHOR OF POWER OF ZERO
“Taxes will be increasing”
“Your best defense is offense—to build tax-free savings”
POWER OF ZERO – TOP THREE THEMES OF TAX-FREE RETIREMENT INCOME FROM TAX-FREE RETIREMENT PORTFOLIO
The Looming Threat of Higher Taxes: The book makes a compelling case that future tax rates are likely to increase significantly. This isn't presented as a mere prediction, but as a mathematical inevitability given the country's rising debt and unfunded liabilities. The author emphasizes that current tax rates are historically low, and that the government will need to raise revenue to address its financial challenges. The book argues that failing to plan for this eventuality is a dangerous gamble that could severely impact retirement savings. According to the book, it's not a question of "if" taxes will increase, but "when" and "by how much".
The Power of the 0% Tax Bracket: The core of the book's strategy is to reach the 0% tax bracket in retirement by strategically utilizing different types of investment accounts. The book explains that there are three types of investment accounts: taxable, tax-deferred, and tax-free. By understanding the pros and cons of each, readers can allocate their funds appropriately to ensure that all their retirement income streams are tax-free. The book highlights the power of the 0% tax bracket, noting that if tax rates double, two times zero is still zero. The book's primary goal is to show you how to avoid the negative impacts of rising tax rates and secure a tax-free retirement.
Strategic Asset Shifting: The book provides a detailed road map for shifting assets from taxable and tax-deferred accounts into tax-free accounts. The book advocates for limiting contributions to tax-deferred accounts like 401(k)s, and instead emphasizing tax-free options like Roth IRAs and Life Insurance Retirement Plans (LIRPs). The author emphasizes the importance of taking advantage of current low tax rates to make these shifts. The book stresses that a haphazard approach will not work, rather you need a comprehensive, math-based strategy. The book recommends seeking help from a tax-free retirement specialist and developing a personalized "Tax-Free Road Map" to optimize your asset shifting.
POWER OF ZERO – KEY MESSAGES ELABORATE ON TAX-FREE FINANCIAL PRODUCTS & TAX-EFFECTIVE RETIREMENT INVESTMENT PORTFOLIO
The Looming Tax Crisis: McKnight begins by establishing the urgency of the issue. He cites the national debt, demographic shifts, and the underfunded liabilities of Social Security and Medicare to make a case for a future tax hike. He references a statement from CPA David M. Walker that future tax rates would have to double to keep the country from going bankrupt.
The Three Buckets: The book explains the three types of investment accounts:
Taxable: Includes common investments like stocks and bonds, taxed annually on growth. These accounts are liquid, suitable for emergency funds but not ideal for long-term growth due to the "double compounding effect" of increasing tax rates on growth.
Tax-Deferred: Primarily 401(k)s and IRAs, where contributions are pre-tax, but distributions are taxed. These accounts are vulnerable to future tax increases and have a "catch-22" aspect due to required minimum distributions (RMDs) and their impact on Social Security taxation.
Tax-Free: Includes Roth IRAs and LIRPs, where money grows and is distributed tax-free. These are the accounts that the book recommends as being the ultimate goal for your retirement savings.
The Power of the Roth IRA: The book highlights the Roth IRA as a powerful tool for tax-free growth and distribution. It debunks the idea that contributing after-tax dollars is a disadvantage, noting that if tax rates remain constant, the result of contributing to a Roth IRA is the same as for a traditional tax-deferred account. The advantage of the Roth IRA comes into play with even the slightest future increase in tax rates. The book also examines Roth conversions as a way to shift assets into the tax-free bucket.
Life Insurance Retirement Plans (LIRPs): McKnight introduces the LIRP as a powerful tax-free accumulation tool with no income limits and less legislative risk. It explains that the LIRP is essentially a life insurance policy designed to maximize cash accumulation, where money can grow and be accessed tax-free, often with the added benefit of a long-term care provision. He suggests that it can be used in situations where Roth IRAs may be limited due to income restrictions.
Tax Sale of a Lifetime: McKnight highlights the 2018 tax cuts and their effect on how to shift assets. He calls the tax cuts a sale on taxes and a window of opportunity before taxes will likely go up. He recommends that you determine your "magic number" for how much you should shift into tax-free assets, and to do it annually until 2026.
Case Study: The book includes a case study with a hypothetical couple, Bob and Sue Jones, to demonstrate how to use the book's principles in an actual plan. The example reviews how the Jones' might shift assets out of taxable and tax-deferred accounts into tax-free accounts, as well as how to use strategies like 72(t) and LIRPs. The book stresses the importance of not exceeding the ideal balances in the taxable and tax-deferred buckets and reallocating the surplus to tax-free vehicles.
Tax-Free Road Map: The book emphasizes the importance of a Tax-Free Road Map, a plan that outlines your ideal balances, contributions, and anticipated rates of growth. The book argues that working with a tax-free planning specialist is essential to create a custom asset shifting schedule.
“Tax-free is always better! Pay less and keep more”
“The only real way to protect yourself ... is to adopt a strategy that puts you in the 0% tax bracket”
PERSPECTIVE OF DAVID KNIGHT – AUTHOR OF POWER OF ZERO
David McKnight is presented as a financial advisor who has spent over twenty years helping clients reach the 0% tax bracket. The book also describes him as the President of David McKnight & Company, mentoring financial advisors in tax-free retirement planning. The book's acknowledgements suggest that McKnight is deeply influenced by other financial experts, such as Ed Slott, which emphasizes the central concept of tax-free retirement. His background as a practitioner gives the book a practical, actionable tone. He is passionate about what he perceives as a looming tax crisis and dedicated to helping people protect their retirement savings, suggesting that the traditional tax-deferred methods leave individuals vulnerable to future tax increases.
POWER OF ZERO OFFERS CLEAR, COMPELLING, ACTIONABLE ON RETIREMENT TAX PLANNING
Compelling Argument: The book presents a clear and compelling case for the necessity of tax-free retirement planning. The mathematical logic behind the looming tax crisis makes the argument convincing and urgent.
Actionable Advice: The book doesn't just highlight a problem; it provides concrete steps to solve it. The three-bucket approach offers a structured framework for asset allocation, and the introduction of the LIRP as a valid tax-free option is insightful.
Clarity: Despite tackling complex financial topics, the writing is clear and accessible to a general audience. The use of examples and analogies helps to clarify the concepts.
Comprehensive: The book is thorough, covering various aspects of retirement planning, including Social Security taxation, Roth IRAs, LIRPs, and required minimum distributions.
Practical Examples: The inclusion of the case study (Bob and Sue Jones) and the discussion of real-world scenarios make the strategies easier to understand and apply to individual situations. The book also offers formulas for how to calculate needed distributions from IRAs.
POWER OF ZERO MAY SHOWCASE COMPLEX FINANCIAL PRODUCTS THAT MAY NOT SUIT ALL READERS
Potential Bias: Given the author's profession as a financial advisor specializing in this specific approach, there could be an inherent bias toward recommending LIRPs and other products that he may be involved in selling.
Complexity: The LIRP, while presented as a tax-free haven, is a complex financial instrument that may not be suitable for all readers. The book may not fully address all the potential risks and drawbacks of LIRPs, making it essential to do independent research and consult a financial advisor.
Limited Focus: While the book strongly emphasizes the benefits of tax-free retirement, it may not adequately explore other financial priorities that readers might have, such as saving for education, or other potential investment vehicles.
Assumptions: The book makes certain assumptions about future tax rates and economic conditions, which could change over time.
Overemphasis on Urgency: The book can feel overly urgent, potentially leading some readers to make rash decisions. While the timeline of tax changes is a real concern, not all readers may have the same risk tolerance and ability to make drastic financial changes immediately.
“The goal during your working years should be to allocate ... so that during retirement all your streams of income are tax-free”
“Free money is good!”
WHO SHOULD READ POWER OF ZERO BY DAVID MCKNIGHT?
This book is primarily targeted toward individuals who are concerned about the impact of future taxes on their retirement savings. Ideal readers may have some financial literary but may not be experts. They may be nearing retirement, or in early retirement years; have significant savings in tax-deferred accounts; and are open to consider unconventional financial planning strategies. Readers may also be financial advisors looking for a new perspective on retirement planning.
WHAT OTHER TAX FREE RETIREMENT BOOKS ARE SIMILAR TO POWER OF ZERO BY DAVID MCKNIGHT?
Other books that address retirement planning and tax minimization include those by Ed Slott, such as "Ed Slott's Retirement Rescue," and other works focusing on tax-efficient investing. It differs from more conventional retirement books in that it explicitly makes the argument for a tax-free retirement and suggests strategies to achieve it. Books that take a more conventional approach to retirement savings and investment may have a different perspective, and there may be good arguments for both positions.
HOW DOES POWER OF ZERO DIFFER FROM OTHER BOOKS ON RETIREMENT FINANCIAL PLANNING?
What sets "The Power of Zero" apart is its singular focus on the 0% tax bracket as the primary goal of retirement planning. It goes against conventional wisdom, which typically emphasizes the growth of tax-deferred accounts. By providing a strong mathematical argument that emphasizes both the "how" and the "why" of shifting assets into tax-free vehicles, it makes a unique contribution to the personal finance genre. The book doesn't just aim to grow your assets; it seeks to grow them in such a way that they will provide tax-free income during retirement. This perspective is novel and is not common in the current literature.
POWER OF ZERO BY DAVID MCKNIGHT – CONCLUSION – RETIREMENT PORTFOLIO PLANNING
"The Power of Zero" is a thought-provoking and action-oriented book that challenges traditional approaches to retirement planning. Its central premise – that future tax rates are likely to rise and that a tax-free retirement is not just a possibility, but a necessity – is compelling and well supported with mathematical reasoning. While the book does have its limitations, particularly regarding the complexity and potential bias associated with LIRPs, its strengths lie in its clear articulation of a novel concept, actionable recommendations, and comprehensive discussion of a very complex issue. It provides valuable insights for anyone wanting to protect their retirement savings from the impact of rising taxes.
“The LIRP is an accumulation tool that shares many of the tax-free attributes”
“Taxes are on sale, every year counts”
FREQUENTLY ASKED QUESTIONS ABOUT POWER OF ZERO BY DAVID MCKNIGHT
If I adopt the strategy described in the book, am I still going to be a good citizen?
The book anticipates that readers will wonder if minimizing their taxes is somehow unpatriotic. The book addresses this concern by quoting Judge Learned Hand, who stated that anyone may arrange their affairs to minimize taxes and that there is no patriotic duty to pay more than the law requires. The book clarifies that the goal isn't to avoid paying taxes altogether, but to pay taxes at today's historically low rates in order to avoid potentially higher rates later. The strategy involves paying taxes to get into the tax-free bucket; it's just about paying them at the right time.
How can distributions from a Life Insurance Retirement Plan (LIRP) be tax-free?
Many readers will find the LIRP concept intriguing, but wonder how it can provide tax-free distributions. The book explains that LIRPs achieve tax-free distributions by taking money out as a loan rather than as a normal distribution. When you take a loan from a bank, for example, it doesn't count as income on your tax return because it is assumed that you will pay it back. With an LIRP, the life insurance company gives you a loan from their own funds, and the interest you pay on the loan is offset by interest earned in a collateral account. The result is that you get access to the money and the withdrawals do not count as income. When you die, the money in the collateral account is used to pay back the loan.
How much money can I put into a LIRP?
Readers will want to understand the limitations on how much they can contribute to a LIRP. According to the book, the IRS links contribution levels in the LIRP to death benefit amounts. Life insurance companies typically limit death benefits to about 25 times your annual salary. So, if your annual salary is $100,000, the life insurance company may allow a death benefit of $2,500,000, which, in turn, would allow you to contribute up to $170,000 per year. The book also notes that you must stream contributions over a period of years rather than contributing it all in a single year.
“If tax rates double, two times zero is still zero!”
“Shift your money into the tax-free bucket ... before tax rates go up for good.”
ABOUT DAVID MCKNIGHT – AUTHOR POWER OF ZERO – RETIREMENT FINANCES
David McKnight graduated from Brigham Young University with Honors in 1997. Over the past 20 years David has helped put thousands of Americans on the road to the zero percent tax bracket. He has made frequent appearances on Bloomberg Radio, in Investors Business Daily and national publications like the New York Times and Reuters. His bestselling book The Power of Zero has sold over 250,000 copies. As the President of David McKnight & Company, he mentors hundreds of financial advisors from across the country who specialize in The Power of Zero retirement approach. He currently resides in Grafton, Wisconsin with his wife Felice and their seven children.
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