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In this book, David Knight provides his readers with a road map of how to get to the 0% tax bracket. This means virtually eliminating tax risk in retirement
Follow the steps in this book and you’ll keep your hard-earned retirement savings out of Uncle Sam’s reach.
Mc Knight discusses three buckets to hold money.
Mc Knight tells his readers that making contributions to these accounts in a haphazard way during one's accumulation phase can have enormous consequences. Furthermore he says that, during working years, allocate the right amount of dollars to each bucket. When this is done properly, during retirement all streams of income are tax free. From a tax-efficiency perspective, investing in the taxable bucket should be just the right amount: six months’ worth of income. Here are some of the consequences of overfunding the Taxable bucket.
Next Mr Mc Knight discusses tax deferred accounts. Examples of Tax deferred accounts are 401(k)’s IRA’s 403(b)’s etc. They all are different, but generally have two things in common.
Even if tax rates in the future are the same as they are today, you could still end up in a higher-income tax bracket in retirement than in your working years. Determining whether to contribute to your tax-deferred bucket really comes down to what we think about the future of tax rates. If you think that your tax rate in the future is going to be lower than they are today, you should put as much money as you possibly can into tax deferred investments.
When Mr Mc Knight discusses the tax-free bucket he defines it as instruments that are free from federal taxes, state taxes, and capital gains taxes at the time of distribution. To avoid state taxes, Mr Mc Knight advises buying bonds issued by the municipality in which you will live in retirement. The following are accounts that are great for accumulating cash tax-free.
Individuals aged 59 ½ receive all distributions from Roth IRA free from federal state and capital gains taxes. Contributions to a Roth IRA are made with after tax dollars, meaning that you do not get a tax deduction at time of contribution. As of 2018, an individual younger than age of 50 ½ is only allowed to contribute $5500 per year into a Roth IRA account.
Roth IRAs do not require withdrawals until after the death of the owner; however, beneficiaries of a Roth IRA are subject to the RMD rules.
Mr Mc Knight also discusses life insurance retirement plans (LIRP). A LIRP is essentially a life insurance policy that is specifically designed to maximize the accumulation of cash within the policy's growth account. With a LIRP, you are buying as little insurance as is required by the IRS while stuffing as much money into it as the IRS allows. When utilized as a tax-free accumulation tool, the LIRP has a number of surprising benefits:
Roth IRAs are capped at $5,500. Once you turn 50, you can contribute up to $6,500 per year. With a LIRP, the IRS poses no limitations to contributions. If you find yourself in a position where your assets repositioning strategy requires a shift that exceeds the allowed contribution to the Roth IRA a LIRP can be useful.
If you find yourself affected by the income limitations imposed by the Roth IRA and traditional IRA’s, a LIRP is an effective alternative. If you earn too much money or lack the necessary earned income to contribute to a Roth IRA a LIRP can be used.
A LIRP can be a very powerful way to protect your ability to contribute dollars to a tax-free account, regardless of congressional legislation.
If you already have a budget for the cost of term life insurance, it may make sense to recapture those premiums, and then divert them to a LIRP, to take advantage of a huge bucket of tax-free dollars that wasn't previously available.
When people utilize the LIRP to cover long-term care risks, they pay for it, but if they die never having needed it, their heirs still receive a tax-free death benefit. In the case of the LIRP, your death benefit doubles as long-term care insurance. To maximize cash accumulation and minimize expenses, the contract must contain as little life insurance as possible while being funded at the highest level allowed under the IRS guideline.
Utilizing these 3 buckets and types of accounts will put you in a zero percent tax bracket in retirement. As we all know taxes are projected to be even higher than they are now. Being intentional and proactive will save you loads of time and stress in the future. There is no better time than the present. If you need assistance following this strategy please reach out and schedule time to speak to one of our experts. No matter where you are on your journey you are not alone. We will work with you to establish a solid plan for your retirement and tax planning needs.
