Is A 0% Retirement Tax Rate Possible?

Well, everyone who has been here to learn about the evolution of money in today's video. I am going to explore the topic: a 0%

retirement

tax

rate

is

possible

, so

retirement

tax is not a new topic here on the channel, we have talked about this many times before and some of the other videos today I want to take a little bit of a different approach to this, in particular I want to talk about a book written by David McKnight called The Power of Zero and in the book he talks about some st

rate

gies to try to help. people get to a zero percent tax rate so here in today's video the first question I want to explore is is it even

possible

for many of us to get to a zero percent tax rate and then I also want to talk about some of the possible dangers of In trying to implement that strategy that you describe in your book, in my opinion, I think you take things from a too aggressive point of view, often encouraging people to pay much higher levels of taxes today in exchange for maybe getting that lower tax rate in the future, but we're going to talk about how we can balance that a little better, maybe some of the strategies we can implement to make that happen, so let's jump right in.

The first thing I want to talk about here is how likely it is. In order for us to actually achieve this 0% tax rate and to get there, I think we need to start by talking about Social Security, so almost everyone watching this video, if you're someone who has worked and put money into the Social Security system, You're going to have some social security benefit and I'm also going to assume that if you're watching this video you're talking about strategies to reduce taxes, I'm just going to go ahead and assume that we're probably in one of those higher income tax brackets right now, so which for 2020 the approximate amount of Social Security benefits that someone would be eligible for at full retirement age would be approximately three thousand dollars a month and it sort of simplifies this.

We will assume that you are also married and we will also assume that your spouse was also at the high end of Social Security benefits. Now that may or may not necessarily be your individual situation, you may have reached the high end. from the Social Security bracket, but maybe your spouse didn't or some combination of that, but I think it will at least give you sort of a framework of what we're trying to look at here to try to figure out how much in taxes we might owe. in retirement here, and we're also going to assume here for many of you who see this that your full retirement age is 67 years old.

Your actual full retirement age for Social Security purposes might be 66 or 66 in some months, but 67 is what we're going to assume at that point. We also know that one of the options and, in fact, one of the tools or strategies What we can implement is to delay Social Security until age 70 and we also know that Social Security will give us an 8% increase in our Social Security benefit for each year we wait after full retirement age, so that number It's going to end up being around 37. 79 is the amount that would be eligible, so the first thing we're going to do is we're going to start with this full retirement age and I have a bunch of numbers written down here so I can make sure I'm doing this right, so if we multiply that by twelve thirty-six thousand dollars a year it means that they are going to receive 72 thousand dollars of income from Social Security alone and if we look at the age of 70 years by time, I multiply that number by two and also by twelve, that will give us 90 thousand six ninety nine, well, then The first thing we want to do is, before we even talk about the money that we have saved in IRA accounts and that will eventually be subject to taxes in the future, the interest, dividends and earnings of capital that we could have from those accounts that are not.

Part of any retirement account is that we just want to look and see, you know, that zero percent tax rate is possible for someone in let's say maybe in one of those higher social security tax brackets and to do that, we'll look at how Security actually calculates that, then they'll take your adjusted gross income and add to that any tax-free municipal bond interest, so any non-taxable interest and that's another reason for that since we're starting to Talk about how we invest things, I'm not going to go into too much detail, but for a lot of people who thought they were doing the right thing by buying a bunch of municipal bonds that could potentially turn against them in terms of how these Social Security taxes and then also they're going to take half of your Social Security benefits, so it's kind of interesting or funny that we're talking about how much of your Social Security benefit is taxable and that Social Security actually adds half of the Security Benefit Social Security that will go into the calculation to determine how much is taxable there, but anyway that's how the numbers work there and therefore for 2020, the amount of income you are allowed to have before Social Security or the IRS should say it starts taxing your Social Security benefits if you are a married couple filing a joint tax return if you earn between $30 and $2,014 a year, up to 50% of your Social Security benefits could be taxable, so, immediately. at bat, if we take half of 72 thousand, that's thirty-six thousand dollars, which puts it right there, so before you add any other form of income, a pension or money from a retirement account or interest or dividends of whatever you are already receiving. be subject to at least 50%, so I think for most of you who are probably watching this video, it will be quite difficult to eliminate taxes completely and you may be planning this five or ten years in the future, Maybe you're in your 50s and you're trying to figure out where you'll be in the future.

By the way, these numbers were set in 1983, which is why they're so low, when Social Security first ran into its first big deficit when They started paying basically more money than was coming in, they got together, they made some amendments and in 1983 they got up to 50 percent of their Social Security benefit taxable, then in 1993 they increased that. to where now up to 85 percent of your Social Security benefits could be taxable and that's if you're going to go over that forty-four thousand dollars a year, so one of the things they actually made a video about this, but it doesn't make too long, which happens when Social Security runs out of money, so one of the things we talked about there and one of the ways they fixed that deficit that Social Security had back in 1983 in 1993 was to do more of the Social Security.

Security benefits are taxable, so in my opinion it wouldn't be surprising if Social Security increased that up to one hundred percent of your Social Security benefits could be taxable, but it's one of the reasons why that more and more people are affected by this is because those numbers were established back in 1983 and that was a lot of money back then, it's still a lot of money today, but you know, because inflation has been a factor in more and more people are affected. with that, so you know that when we talk about these numbers, we're talking about things in terms of today's dollars so you know that if you're 50 years old and you're looking at your Social Security Statement, you might be seeing something that says, hey , if you retire at your full retirement age, you could be eligible to receive $3,000 a month.

Well, by the time you get there, that number could be a lot higher because hopefully they keep it, but there will be a Social Security Cost of Living Adjustment that could cause that to go up, but we're going to keep things simple more or less as easy as we can, but keeping it in terms of today's dollars, so that's the first thing. Most of your Social Security benefit could be taxable, so while a zero percent tax rate may not be possible for most of us watching the video here, especially considering our Social Security benefits Once they come into effect, there are still some ways. maybe before Social Security goes into effect, we could get to a very, very low level in the tax bracket and actually start thinking about implementing some strategies and what I want you to think about here is not necessarily how can I do my retirement tax rate to go to zero, but how can I balance my tax rate over time?

And what I'm talking about specifically here is that if we talk about three main periods, you know, we'll talk about the period that you're still working on and some of the strategies that you might think about. about implementing it right now while you work, we're talking about early retirement and for some of you watching the video, early retirement if you've really done a great job saving, it could be as early as age 50 55, maybe a lot sooner than you. You're even eligible to activate Social Security benefits and then we'll talk about 70 or 70 and a half and two things happen, one at age 70, that's the maximum age you can expect to receive Social Security benefits. fully max out how much you're getting there and then at age 70 and a half your required minimum distributions kick in and again I'm not going to go into Tail too much in this video here, but what I really want to talk about here is some of these things of early retirement and some of the strategies and things that you might want to think about, so one of those things is if you're delaying Social Security and you're going to assume maybe for the purposes of this video that you don't have a pension. plan, if you have a pension, obviously you're going to have to add that income to this as well, but for 2020 the standard deduction, which is what I think a lot of the people who are retired will do because they actually changed the way they run personal exemptions and the way they make some of the itemized deductions.

I think more and more people will default to the standard deduction here, but for 2020 the standard deduction is twenty-four thousand eight hundred and then a little bit. One advantage that a lot of people don't necessarily know about is that if you're over 65, you actually get a addition of one thousand three hundred dollars to that standard deduction if you are over sixty-five years old and if married, you and your spouse would get that for a total of twenty-six thousand dollars a year and that would bring the figure to twenty-seven thousand four hundred, so if not You have a pension, you have not activated your Social Security. profit and we'll assume you're controlling the capital gains and interest on dividends for those taxable accounts or we'll leave them out of the picture here, but right away you can have twenty-seven thousand four hundred dollars of income from any source and not pay any taxes on income because that will be completely offset by that standard deduction, but here's another little bonus: if you have capital gains, they actually have a capital gains tax table.

That's a little different than the regular tax table, so for 2020 you can have up to forty thousand dollars of capital gains income and have it at a zero percent tax rate if you're single and that number doubles to 80 thousand. dollars if you are married and filing a joint tax return, no, yes that's an acronym, but I just made it up. mfj, you are married and filing a joint tax return, you could have $80,000 of capital gains income, so here are a couple of strategies that you could potentially implement, so one is you. We could say that you take out twenty-seven thousand four hundred dollars from an IRA, which is money that would normally be taxed at your ordinary income tax rate.

You could use it to supplement your lifestyle, your living expenses if you don't need it or if you had a different way of doing it: you could take that twenty-seven thousand four hundred dollars and convert it to a Roth IRA and pay essentially zero percent taxes on it. . The other thing you can also do is not only be able to do that. with the twenty-seven thousand four hundred dollars, but you could also sell some securities that could generate a long-term capital gain and, in fact, you can have up to eighty thousand dollars of those long-term capital gains and still have that zero tax for hundred. range, so it could be a hundred thousand dollars worth of stocks that maybe you bought for twenty thousand dollars, maybe you got lucky and bought a company like Apple or Amazon when it was much cheaper than it is today and you have that eighty thousand or it could be two hundred thousand dollars worth of stock or whatever, it depends on what your cost base is, it's not that, but that could do a couple of things, number one is reset the tax basis for those stocks, but it could also be something you could use to live on, so one of the things we talk a lot about is those three main tax brackets where you have the non-retirees,you have the traditional IRAs or the 401k plans and then you have the Roth, so we In fact, I'm going to make a video.

I was recorded immediately after this video. Here we are going to address some more specific strategies on this ship. What we really want to think about here is not just how we get down. our tax bracket, but how do we balance that tax bracket between working on early retirement and then later retirement? But in particular, we want to make sure that we're not very affected by these RMDs and those MDS could be very, very substantial, they could push a lot of people who were never really in a very high tax bracket, they could push them into one of the tax brackets. highest in the world.retirement if they're not careful and also two of these non-retirement assets that can also become a burden if we don't do something to control those capital gains and that's what we'll talk about here in the next video.

Anyway, I hope this video was helpful, we kind of bounced around a little bit and I think like I said, for most of us the zero percent tax bracket, at least throughout our retirement, is not going to be possible because I think than Social Security. alone will push us into one kind of tax bracket there, but we may be able to take advantage of some of the current tax rates that are available to us, specifically the standard deduction, and make sure that we fully utilize it to give ourselves a higher tax bracket. low that also uses that zero percent tax rate on long-term capital gains, which I think a lot of people leave on the table and never do, and end up paying taxes. about that money later, so anyway, if you find that we're talking about something interesting and you think that maybe you want help with some of this stuff, you can go to wealth vision plan.com and you can get more information. about our comprehensive financial plan, you can also check out our Free Resource Center that we have at Money Evolution where we have more in-depth discussions about this.

Some videos that are not here on our YouTube channel. We also have some PDFs and worksheets that go along with that to help you plan for your retirement, so have a great day everyone and I'll see you here in one of our next videos, thank you.