How to Retire in a Zero Percent Tax Bracket 

Thu, Jun 20, 2019 - 2:30pm

This time on Financial Sense’ Lifetime Income program, Jim Puplava lays out a path to retire in a zero percent tax bracket with some serious planning and preparation.

Tax Rates Headed Higher

No matter who controls the Federal government, we are likely to see higher tax rates in the decades ahead, Puplava noted. This is because entitlement spending and interest due on the national debt will consume 100 % of government revenues by 2026, he stated, adding that this figure comes from the Congressional Budget Office. Without dramatic reforms enacted now, Congress will be forced to either reduce benefits, raise taxes, or do some combination of the two.

Given that we’re in the midst of an election cycle, depending on who wins the presidency and Congress, we could see steeply higher tax rates in the near-term. Reform is unlikely, as politicians are looking to get reelected – not make hard decisions that might hurt their chances to do so.

With interest rates likely to rise, straining our ability to repay debt and fewer workers supporting every retiree on Social Security, taxes are likely going to be raised to meet obligations.

“According to the Congressional Budget Office, if Social Security, Medicare and Medicaid go unchanged, the government will be forced to adopt a three tax bracket system,” Puplava said. “The CBO says we will have to go to a 25%, 63% and a 90% tax rate system. Think back to the time in 1960 when the tax brackets went from a low of 20%, up to 69% and the highest tax bracket was 91%. … Like it or not, your taxes are going to be going up in the next decade. The government simply has no choice. They've made financial promises to voters that they are literally not going to be able to keep.”

Reaching for a Zero Tax Rate

It is possible, though not necessarily easy, to reduce your tax burden, sometimes all the way down to zero percent in retirement. The first option, Puplava noted, is to move to a zero percent tax state, such as Nevada, Texas or Florida. This makes even more sense now that state income taxes are not deductible on your federal tax return, Puplava added. Additionally, property tax deduction amounts are capped at $10,000.

The next step is to set up a tax-free Roth, if you qualify, Puplava noted. Beyond certain levels of income, your ability to put money into a Roth is phased out. However, that does not apply if you work for a company that offers a Roth 401k option.

You should also consider converting your IRAs to Roth IRAs, Puplava added. That way, you can build up a tax-free source of income and you can avoid the high tax trap of required minimum distributions later on in life. After age 70 and a half, the amount you are required to take out of your IRA will increase as a percentage each year. This forces many retirees into a tax trap, where they’re faced with permanently higher taxes.

Another option, if you are retired already, is to buy dividend-paying stocks, and earn tax-free income in the process. If you're single, the first $39,375 of dividend income or capital gains is taxed at zero. For a married couple, that figure is $78,750, Puplava stated.

Finally, a life insurance retirement plan, or LIRP, is an accumulation tool that shares many of the tax-free attributes of a traditional tax-free Roth IRA. Not only are distributions tax-free, but they don't count toward the income thresholds that trigger taxation of Social Security.

It will take time to achieve these goals, but it is possible to retire in a zero-percent tax bracket with careful planning, Puplava said.

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