Paying No Taxes in Retirement - As Good as it Sounds?
Wouldn’t it be nice to keep Uncle Sam’s hands out of our pockets and never pay taxes again?
The idea of not paying taxes in retirement was so intriguing that I read David McKnight’s “The Power of Zero” three times in the last 5 months. I needed to clearly understand his strategy.
In it, he gives a blueprint to retire in a 0% tax bracket. When his plan is executed perfectly, you don’t pay a dime in taxes when you retire. And it’s all legal! There aren’t any scams or funny accounting practices.
Here is the blueprint according to McKnight:
You need 6 months worth of living expenses in a general investment (taxable) account.
You need your IRA’s (tax deferred) required minimum distributions (RMD) to equal the standard tax deduction ($24k standard deduction this year for taxes, so total account value ballpark $650,000).
All the rest is in a combination of Roth IRA’s and Life Insurance Retirement Plans, LIRP’s (tax free).
I love his message: We work hard for our money and deserve to keep it when we need it most.
But I also manage peoples’ financial lives for a living, and something about the Life Insurance Retirement Plan (LIRP) didn’t sit well with me.
So, instead of making an emotional decision, I ran the numbers. Math is not an opinion. I wanted to see what a LIRP cost you over time (I didn’t include the financial projections in the blog, but if you want them, send me an email and I’ll get them to you.)
And it turns out I don’t agree with McKnight’s stance on using a Whole Life Insurance Policy as a retirement vehicle.
You give up too much using a LIRP. You miss the upside of strong markets. You’re bound to large monthly premiums that, if you cannot sustain payments, will derail your whole retirement plan. And you’re going to be confused about your policy. I’ve still never seen a policy that I don’t get tripped up reading.
My projections show that unless your income or capital gains tax bracket exceeds 50% in retirement, I can’t even justify considering a LIRP, and even then it’s a stretch.
Taxes will absolutely go up in the future, with that I agree. But how much and for how long is impossible to predict.
Nonetheless, the book inspired me. Here are three steps I think are worth considering today. Some of these get complicated, so talk with a professional as you explore these avenues:
See if your company's 401k offers a Roth option. If so, think about paying taxes today and investing in a Roth 401k instead of a traditional 401k.
Consider converting existing IRA dollars to Roth IRA dollars by paying taxes on them today.
Invest more money in a general investment account since capital gains taxes have never exceeded 35%.
If you have an existing whole life plan you’re not sure is right for you, I’d be happy to look at it at no cost to you and help you decide if it makes sense to keep.
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