David McKnight (2)

A small foot print with some interesting ideas and assumptions. An underlying assumption is that taxes will have to increase in the future. That seems very plausible. Planning should take place based on that base assumption. There are decisions and actions that can take place today to be ready for a different financial future tomorrow. But that is where the thread starts to unravel. Use of arcane life insurance products with high fees. Going back to the base assumption of higher taxes - why should these LIRPs be any better shielded than other financial assets? Disconnect in the logic.… (meer)

Due to our country’s current, historically low, income tax rates, David McKnight, the author of “The Power of Zero” feels that now is the best time to use non-deductible savings instruments in our retirement plans. Taxes will never again be this low, according to McKnight. His opinion on this is based on our growing record debt and the underfunded Social Security problem. The current tax rates phase out in 8 years by which time the need to dramatically raise taxes will be indisputable. People saving for retirement today will have to pay taxes on required EMD withdrawals from their 401K’s and their IRA’s at much higher future tax rates while those with money in non-deferred savings instruments will pay the lowest taxes or, for a few prescient ones, no taxes.

It isn’t necessary to reduce a future retiree’s tax-deferred savings to zero under McKnight’s proposed plan. Most of us already have 401K and IRA retirement savings accounts. When we retire, we should be able to use the standard deduction in the year of ERM withdrawal to shield that money from taxes, assuming that the total value of those accounts isn’t too large to do so.

One enlightening passage addressed the taxability of Social Security income. Non-taxable sources of income are considered by the IRS when determining how much of a person’s social security income is taxable. Municipal bond income is one of the sources that get into that calculation. Even though muni income is not subject to federal income taxes, it may be subject to state and local income tax and, even if not taxed by the state of residence, it is used in the total income calculation used in determining social security taxation.

A formerly unknown retirement avoidance tool that was mentioned, unknown to me that is, is the LIRP, Life Insurance Retirement Plan. Congress allows a taxpayer to buy life insurance with large periodic payments. The bulk of the payments add directly to the cash value of the policy with a small portion going toward the cost of the insurance itself. The death benefit and cash surrender value go to our beneficiaries tax-free with the result that none of that money being subject to estate tax or to income tax. The benefit to the purchaser of the policy is that the cash values in these policies are liquid. The purchaser can borrow those funds back at any time for any purpose. The borrowings carry a modest interest rate to legitimize the transaction as a loan to the IRS but the loan is an investment of the insurer and its interest earnings are added to the policy’s cash surrender value. I regret that the author did not provide the names of insurance companies who sell these types of policies as I was unable to find any with a google search.

Retirement plans are as individualistic as any form of investment plan. I’ve tried doing it on my own; but, after reading “The Power of Zero”, I realize that I have left myself open to paying more taxes than I could have had I taken a different savings tact prior to retirement. Don’t make the same mistake.

We’re all hoping to enjoy a healthy fun filled retirement someday. IRS required minimum distributions are unavoidable so part of our retirement plan needs to include a strategy for minimizing the tax consequence they represent.

Read “The Power of Zero” and other retirement books as they all provide ideas and raise issues that need to be considered and addressed in a good retirement plan.… (meer)