The Power of Zero Quotes

“The following is a list of the most common sources of provisional income: One-half of your Social Security income Any distributions taken out of your tax-deferred bucket (IRAs, 401(k)s, etc.) Any 1099 or interest generated from your taxable-bucket investments Any employment income Any rental income Interest from municipal bonds The IRS adds up all your provisional income and, based on that total and your marital status, determines what percentage of your Social Security benefits will become taxed. That percentage of your Social Security benefits is then taxed at your highest marginal tax rate. The provisional income thresholds are outlined below.”
― David McKnight, The Power of Zero, Revised and Updated: How to Get to the 0% Tax Bracket and Transform Your Retirement

“Once you approach the $189,000 income threshold for a married couple ($120,000 for singles), your ability to make Roth IRA contributions begins to phase out.”
― David McKnight, The Power of Zero, Revised and Updated: How to Get to the 0% Tax Bracket and Transform Your Retirement

“Contributions to the Roth IRA are made with after-tax dollars, meaning that you do not get a tax deduction at the time of contribution. However, once your money is in a Roth IRA, your dollars grow tax-free and are tax-free upon distribution as long as you’re at least 59½.”
― David McKnight, The Power of Zero, Revised and Updated: How to Get to the 0% Tax Bracket and Transform Your Retirement

“Second, money distributed from a truly tax-free investment cannot count as provisional income. In other words, true tax-free investments do not contribute to the thresholds that determine whether your Social Security benefits get taxed. Not to pick on municipal bonds again, but interest on these bonds does count as provisional income and may cause a portion of your Social Security to be taxed. So, an investment vehicle widely touted as tax-free doesn’t even satisfy the two litmus tests required of a truly tax-free investment.”
― David McKnight, The Power of Zero, Revised and Updated: How to Get to the 0% Tax Bracket and Transform Your Retirement

“It is true that the interest from municipal bonds is free from federal tax, but it’s not always free from state tax. To avoid state tax, you have to buy a bond issued by the municipality in which you live.”
― David McKnight, The Power of Zero, Revised and Updated: How to Get to the 0% Tax Bracket and Transform Your Retirement

“If you’re like most Americans, you have the lion’s share of your wealth accumulated in the first two buckets—the taxable and the tax-deferred. If that’s the case, don’t despair, because there is a third bucket. Some people call this final bucket tax-advantaged, some tax-preferred, still others tax-exempt, but for our purposes, we will call it the tax-free bucket.”
― David McKnight, The Power of Zero, Revised and Updated: How to Get to the 0% Tax Bracket and Transform Your Retirement

“To determine if your tax-deferred balances are already too big, you must calculate the number of years until retirement, your contributions, employer match, and the rate of growth you anticipate on your investments. If your balances are too big, you’ll need to employ some of the shifting strategies we will discuss in the next chapter. A good tax-free retirement specialist armed with the appropriate software should be able to help you determine the ideal balance in this bucket today”
― David McKnight, The Power of Zero, Revised and Updated: How to Get to the 0% Tax Bracket and Transform Your Retirement

“While it might take a bit of math to figure out, there is generally a perfect amount to have in the tax-deferred bucket by the time you retire. In short, you want RMDs at age 70½ to be equal to or less than whatever your deductions happen to be in that year (which is $24,000 in today’s dollars).*4 In most cases, if you contribute only up to your employer match during working years, your 401(k) balance will be at or below this ideal amount by the time you retire.”
― David McKnight, The Power of Zero, Revised and Updated: How to Get to the 0% Tax Bracket and Transform Your Retirement

“The Rock: You have to remember that the IRS wants to tax you on your money so badly that, at a certain point, they will force you to take money out. This happens at age 70½, and it’s called a Required Minimum Distribution (RMD). If you forget or choose not to take the money out, the IRS imposes what’s called an excise tax. In reality it’s a penalty, and it’s an astounding 50% of your RMD. In other words, if you were supposed to take out $10,000 but didn’t, you would get a bill in the mail for $5,000. And that doesn’t even include the income tax! Throw in another 30% (24% federal and 6% state) for that, and you’re looking at forfeiting 80% of whatever you were supposed to take out but didn’t. As you can see, the IRS is pretty serious about getting their money. The Hard Place: Now we understand what happens if you don’t take enough money out of your tax-deferred investments. But what happens if you take out too much? Beyond paying increasingly higher amounts of tax, the IRS says that as much as 85% of your Social Security becomes taxable. What?! you may be thinking. Social Security felt like a tax when it came out of my paycheck, and now they’re going to tax it before I get it back? That’s like a double tax! Sadly, you read correctly.”
― David McKnight, The Power of Zero, Revised and Updated: How to Get to the 0% Tax Bracket and Transform Your Retirement

“It all comes down to deductions. 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!”
― David McKnight, The Power of Zero, Revised and Updated: How to Get to the 0% Tax Bracket and Transform Your Retirement

“Because many of the itemized deductions phase out before retirement, most retirees are stuck with the standard deduction. So, if you need $120,000 per year of income in retirement and your deductions are only $24,000, then your taxable income would be $96,000 per year. That puts you at a marginal federal tax rate of 22%. Throw in another 6% (on average) for state tax, and you’re looking at a marginal tax rate of 28%. That’s a lot higher than most retirees are anticipating!”
― David McKnight, The Power of Zero, Revised and Updated: How to Get to the 0% Tax Bracket and Transform Your Retirement

“When you contribute money to a tax-deferred account, it’s a bit like going into a business partnership with the IRS. The problem is, every year the IRS gets to vote on what percentage of your profits they get to keep.”
― David McKnight, The Power of Zero, Revised and Updated: How to Get to the 0% Tax Bracket and Transform Your Retirement

“The tax-deferred accounts with which Americans are most familiar are 401(k)s and Individual Retirement Accounts (more commonly known as IRAs). Other tax-deferred accounts, such as 403(b)s, 457s, SIMPLES, SEPs, and Keoghs, have different rules that apply to them, but they all generally have two things in common: Contributions are tax-deductible. Generally, when you put money into this bucket, you get a tax deduction. For example, if you make $100,000 this year, and you put $10,000 into your 401(k), your new taxable income is $90,000. Distributions are treated as ordinary income. When you divert a portion of your income to a tax-deferred investment, all you’re really doing is postponing the receipt of that income until a point in time much further down the road. When you take the money out, you pay taxes at whatever the rate happens to be in the year you make the distribution. For that reason, the IRS calls these distributions ordinary income and taxes them accordingly.”
― David McKnight, The Power of Zero, Revised and Updated: How to Get to the 0% Tax Bracket and Transform Your Retirement

“The tax-deferred bucket has become the default investment account for most Americans, primarily because of the ease with which contributions are made. In the case of a 401(k) and other employer-sponsored plans, money gets zapped right out of your check and into a mutual fund portfolio. Out of sight, out of mind—what could be better? Throw in a matching contribution from your employer and it seems like a no-brainer.”
― David McKnight, The Power of Zero, Revised and Updated: How to Get to the 0% Tax Bracket and Transform Your Retirement

“since the pre-tax investment income from CDs is counted as provisional income, this couple was unwittingly causing their Social Security benefits to be taxed. Not only were they surrendering a portion of their investment growth to taxes, they were surrendering a portion of their Social Security as well.”
― David McKnight, The Power of Zero, Revised and Updated: How to Get to the 0% Tax Bracket and Transform Your Retirement

“the IRS created income limits, or “thresholds,” that determine whether or not your Social Security benefits will be taxed. The types of income that contribute to these thresholds are collectively referred to as provisional income. Any growth which you experience in your taxable bucket counts toward these thresholds and could potentially cause your Social Security benefits to be taxed.”
― David McKnight, The Power of Zero, Revised and Updated: How to Get to the 0% Tax Bracket and Transform Your Retirement

“Social Security Taxation To further complicate matters, when you don’t limit your investment in the taxable bucket, it can have unintended consequences for your Social Security benefits. In 1983, President Ronald Reagan and House Speaker Tip O’Neill helped pass a law that would tax Social Security benefits in order to ensure the long-term viability of the program.* Under this legislation,”
― David McKnight, The Power of Zero, Revised and Updated: How to Get to the 0% Tax Bracket and Transform Your Retirement

“Another reason to limit investment in this bucket is what I call the “double compounding effect.” As your balance in the taxable bucket grows, your 1099 (or tax bill) grows as well. To make matters worse, as tax rates rise, the amount of taxes you owe on that ever-increasing 1099 likewise increases. So, in a rising-tax-rate environment, your tax bill can increase at alarming rates!”
― David McKnight, The Power of Zero, Revised and Updated: How to Get to the 0% Tax Bracket and Transform Your Retirement

“All this unfettered taxation, of course, raises the question, “If these investments are 100% taxable, why have them at all?” The answer is liquidity. Generally speaking, it’s easy to get your hands on these investments, which means that they make for great emergency funds. Financial experts generally agree that we should have roughly six months’ worth of income in these accounts as a buffer against life’s unexpected emergencies. Having too little means that we can be forced to withdraw money from illiquid investments, incurring unwanted taxes or penalties. Having too much, on the other hand, means that we can be disproportionately affected by the rise of taxes over time. From a tax-efficiency perspective, therefore, investments in this bucket should be just the right amount: about six months’ worth of income.”
― David McKnight, The Power of Zero, Revised and Updated: How to Get to the 0% Tax Bracket and Transform Your Retirement

“Consider the following example: If you have $100,000 in a CD and it grows 2%, you have a taxable event. You will have $102,000 in your account at the end of the year, but you will have to pay federal and state tax on every last bit of that 2% growth. So, $2,000 gets thrown right on top of all your other income and is taxed at your highest marginal tax rate. Assuming marginal tax rates of 30% (24% federal, 6% state), you would owe the IRS $600. So you didn’t really experience $2,000 of growth, you only experienced $1,400. Thus, your after-tax rate of return on that $100,000 is only 1.4%. This annual taxation is one of the perils of the taxable bucket.”
― David McKnight, The Power of Zero, Revised and Updated: How to Get to the 0% Tax Bracket and Transform Your Retirement

“How can you tell if your investment is taxable? The tip-off is the love letter you get from the financial institution at the end of every year. It’s called a 1099. Simply put, it’s a tax bill. It tells the IRS how much taxable income you earned from a given investment.”
― David McKnight, The Power of Zero, Revised and Updated: How to Get to the 0% Tax Bracket and Transform Your Retirement

“A taxable investment is one that requires you to pay taxes on the account’s growth each and every year. Included in this bucket are common, everyday investments like money markets, CDs, stocks, bonds, and mutual funds.”
― David McKnight, The Power of Zero, Revised and Updated: How to Get to the 0% Tax Bracket and Transform Your Retirement

“Critical to your journey toward the 0% tax bracket is an understanding of the three basic types of investment accounts. For our purposes, we’re going to refer to these three accounts as buckets of money. The three buckets are taxable, tax-deferred, and tax-free.”
― David McKnight, The Power of Zero, Revised and Updated: How to Get to the 0% Tax Bracket and Transform Your Retirement

“The United States currently spends roughly 76 cents of every tax dollar it brings in on four items: Social Security, Medicare, Medicaid, and interest on the National Debt.*3 Absent any action on the part of Congress, however, the percentage of the government’s revenue required to pay for these four big-ticket items could balloon to 92 cents of every tax dollar by the year 2020.*4 As these four expenses grow and compound, they begin to crowd out all other government expenditures.”
― David McKnight, The Power of Zero, Revised and Updated: How to Get to the 0% Tax Bracket and Transform Your Retirement

“The greatest of these unfunded obligations is the universal healthcare system for seniors implemented as part of Lyndon Johnson’s “Great Society” domestic programs of the 1960s. Medicare suffers from the same demographic challenges as Social Security. As of 2017, it costs the government over $590 billion per year, and these costs continue to spiral out of control. According to Walker, the fiscal strain of these two programs alone could bankrupt the United States of America.”
― David McKnight, The Power of Zero, Revised and Updated: How to Get to the 0% Tax Bracket and Transform Your Retirement

“Today, there are no longer 42 people contributing to Social Security for every one person who takes money out of the program. The ratio has fallen to 3 to 1.*1 And in another 10 years, it’s going to be closer to 2 to 1. Compounding the problem, Americans can now draw Social Security as early as 62 and, due to advancements in science and medical technology, retirees are living longer than ever. The reality is, if you start drawing on Social Security at 62, you’ll keep drawing it, on average, until age 85. In fact, octogenarians are the fastest-growing segment of our population!”
― David McKnight, The Power of Zero, Revised and Updated: How to Get to the 0% Tax Bracket and Transform Your Retirement

“As a rule of thumb, you should always put money into your 401(k) up to the employer match, but nothing more.”
― David McKnight, The Power of Zero, Revised and Updated: How to Get to the 0% Tax Bracket and Transform Your Retirement