Power of Zero- How to Get to the 0% Tax Bracket and Transform Your Retirement
On January 11, 2011, a CPA by the name of David Walker appeared on a national radio show 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 solutions with anyone who will listen.
To understand the urgency behind David Walker’s mission, we need look no farther than the mathematical realities facing America from Social Security, Medicare and the National Debt. The first two, Social Security and Medicare, are driven primarily by two facts. First, there was a demographic glitch that happened after World War II when soldiers started coming home and having children at a rate much faster than their parents had; and second, people are living longer than they have in the past. When Social Security was first introduced in 1935, it was set-up as an insurance against living to long. The average life expectancy at the time was only 62 and a person couldn’t withdrawal benefits until age 65. Fast forward 85 years and now what we have is an expensive retirement program. In fact, if you live until age 62 your average life expectancy is now 85.
When we add Medicare into the mix, the problem is compounded. Medical costs are outpacing inflation and with people living longer they are needing medical care for a much longer period-of-time. Now as far as our national debt is concerned, all we need to do is look around us to see how fast our debt is spiraling out of control. This year alone it is anticipated we will add over five trillion dollars to our deficit.
With so much bad news surrounding us, it may seem like we should be in a state of gloom and doom, but all is not lost. There is some good news to be found in all of this, which is the fact we are enjoying a time of historically low tax rates. There are only two other times, since taxes were brought about in 1913, that tax rates have been lower.
What does this mean to you and I? This means we have time to prepare ourselves for the looming taxes, because we know when the first increase in taxes is going to happen. The next increase is scheduled to happen on, January 1, 2026. With this unique knowledge comes power.
The power you have is the time to plan and to take the steps necessary to get into the zero percent tax bracket in retirement. The process will require you to pay some taxes at today’s historically low tax rates, but if done right, paying the taxes now will help you extend your retirement money up to 15 years longer.
The planning process is as simple as filling three buckets. The taxable bucket, the tax deferred bucket and the tax-free bucket. The taxable bucket should only include your emergency fund money, which most financial advisors agree should be 6 months of your average living expenses. The tax deferred bucket should not have more than $500,000 in it, for a married couple. The reason for this is because when you are forced to take out required minimum distributions at age 72 you want to make sure your pension income does not exceed your standard deduction. If it does, not only will you be paying taxes on the RMD, you probably will also have to pay tax on your social security, which is going to increase your tax burden substantially. The rest of your money should go into your tax-free bucket. This bucket should include things such as Roth IRAs, Roth conversions and your Life Insurance Retirement Plan.
