Book Review – The Power of Zero by David McKnight (revised and updated)

An excellent book that starts from the basis that taxes will be increasing. The book is short, but full of good information and ideas for the reader. This book has been revised from the original 2013 edition, to take into account the new tax law changes that are coming into effect in 2018.

The author talks about the all the underfunded mandates of the federal government (Social Security, Medicare, etc.) and how the future must see a rise in tax rates in order to help fund these costs. He jokes about a CPA on a national radio show who talked about the grim financial situation of the country and asked listed to come up with a four-letter word to explain the problem. After shooting down “debt”, “wars” and “kids, he finally gave the answer – “Its Math.” The key question of the book is “are you prepared?”

The first part of the book, the author goes into some detail of our current financial situation in the US, the history that led us to it, and how politicians have tried to deal with it (or not deal with it) over the last hundred years. He states that due to these issues, the tax rates are due to rise, in some cases dramatically. He then posits and answer – do what you can to get your tax rate to zero, so that even if the tax rates double, it won’t affect you. The method involves using the historically low tax rates now, to put you in the driver’s seat in the future.

The Author then goes into the three primary buckets that people have their retirement finances in:

  1. The taxable bucket (brokerage accounts, savings accounts, etc.)
  2. The tax-deferred bucket (401Ks, 403Bs, Regular IRAs, etc.)
  3. The Tax-Free bucket (mostly Roth IRAs, non-deductible IRA, )

For each of these, he discusses their strengths, weaknesses, optimum uses, and optimum amounts to have in at retirement, based on the current tax code. He doesn’t discuss asset allocation (% of stocks vs. bonds, etc.), just the amount that should be in each, based on the 2018 law. For example, with 401K/IRAs, if you can keep your RMD (required minimum distribution) under the standard tax deduction ($24K for 2018) then that money comes to you tax free.

The author also covers a Life Insurance Retirement Plan (LIRP) which is a method of using a life insurance policy to put away money tax free, and then withdraw it tax free in the years ahead. It’s a complicated product, and doing it incorrectly can cause you to have tax penalties. Depending on the policy, it also can be used to help pay for Long-term care. The author lays out its advantages, but also urges the reader to get professional assistance in setting it up.

The author closes out by going through a case study, and showing how an individual can take advantage of today’s tax rates to set themselves up for being tax free in the future. Some of the methods include:

  • Using money in bucket 1 (taxable) to pay the taxes for assets in bucket 2 (tax-deferred) into bucket 3 (tax free)
  • Shifting the deposits from your paycheck from a tax-deferred item (like a regular 401k) into a tax-free item (Roth 401K or Roth IRA)
  • Using LIRPs to save tax-free money and prepare for potential costs for Long-Term care
  • Using the rule 72(t) to begin accessing your 401K/IRA before age 59-1/2
  • Using the standard deduction to be able to access some of your tax-deferred money in retirement
  • Dealing with Social Security and Pension payments as you seek to remain at a 0% tax rate

I’d rate it an A, and a must read for any FIRE person who wants to learn about how to handle their money going into retirement.

  • MinaFI walks through how he is going to use a similar strategy to pay $0 in income tax

Mr. 39 Months

Leave a Reply

Your email address will not be published. Required fields are marked *