The Best Tax-Free Account for Retirement

0:00Hey folks, David McKnight here. Here's a sneak peek at my next book, The Secret Order of Millionaires. Meet Caleb Callaway, a cocky social media investment guru with millions of followers who believes meme coins and NFTs are the future of wealth creation. But when his honor steaks as defending those ideas as brutally rejected by his professors, threatening his equity stake at a top investment firm, his world starts to crumble. Desperate to rebuild his future, Caleb turns to Ron, an elderly janitor who introduces him to The Secret Order of Millionaires. A mysterious group of ordinary people who quietly built extraordinary wealth. It's a modern financial parable grounded in real world principles that can transform how young Americans build wealth, protect their security, and escape crushing tax burdens. Prior to The Secret Order of Millionaires today on Amazon and discover the roadmap to true financial freedom. Today, I want to talk about the one tax-free income stream that I believe is the most overlooked of all. And it involves something most people don't even think of as tax-free income. I'm talking about leaving enough money in your traditional IRA so that your required

1:01minimum distributions can be completely offset by your standard deduction and retirement. A tax freight train is bearing down on your retirement. To protect yourself, you'll have to harness the power of zero. Hey folks, David McKnight here, best selling author of The Power Zero. Today, I want to talk about what I believe is the best tax-free account for retirement. And the funny thing is, it may not even be an accountant you've ever thought about as tax-free. If you follow my word for any length of time, you know that I am a huge believer in tax-free retirement strategies. And the reason it's simple, when you look at the fiscal trajectory of our country, becomes increasingly clear that taxes are likely to rise dramatically in the future. The United States is $39 trillion in debt, and as interest on that debt continues to grow and compound, the government will eventually have to find ways to service it. Historically speaking, when governments face massive debt burdens, they typically do a

2:02combination of two things. They cut spending or they raise taxes. Given how difficult it is politically to cut spending, many economists believe that higher taxes are almost inevitable in the years ahead. I'm predicting that by 2035, the federal government will begin phasing in much higher levels of taxes. That means we're likely to see these near-historically low tax rates for another nine or ten years. That's why building tax-free streams of income for retirement has never been more important. Fortunately, there are several different vehicles that allow you to generate tax-free income in retirement. Let me briefly walk through the ones I recommend for most of my clients. I'll discuss the attributes that make them unique and explain why you can justify their inclusion and your balanced, comprehensive tax-free retirement plan. The first is the Roth IRA. Roth IRAs are incredibly powerful because they allow your money to grow tax-free and distribute tax-free in retirement. They also provide tremendous liquidity because you've already paid taxes on your contributions.

3:04You can access your principle without penalties. That flexibility makes the Roth IRA one of the most popular tax-free accounts in the retirement world. Another powerful option is the Roth 401k. These accounts have many of the same tax-free benefits as Roth IRAs, but they also come with an additional advantage. Many employers provide matching contributions in their retirement plans. That means you can receive free money from your employer while still building tax-free retirement income. You can even have that match directed to the Roth portion of your 401k. Then there are Roth conversions. Roth conversions allow you to convert money from tax-afford accounts like traditional IRAs or 401ks into Roth accounts. The beauty of Roth conversions is that there is no limit on how much money you can convert each year. As long as you're willing to pay the taxes today, you can shift large amounts of money into the tax-free bucket. Mid-Romney, for example, is rumored to have over $100 million in his IRA. He could shift every last dime of that IRA to Roth tomorrow if he so chose. Another option that many people overlook is properly structured cash value life insurance.

4:08In design correctly, these policies allow money to grow tax-afford and be access tax-free through policy loans. They also provide a death benefit that you can receive in advance of your death for the purpose of paying for long-term care and retirement they can also serve as a volatility buffer allowing you to draw money from the policy after a down year on the market instead of selling stocks at depressed prices. All of these strategies have real merit. In fact, I typically recommend incorporating some or all of them into a comprehensive retirement plan. But today, I want to talk about the one tax-free income stream that I believe is the most overlooked of all. And it involves something most people don't even think of as tax-free income. I'm talking about leaving enough money in your traditional IRA so that your required minimum distributions can be completely offset by your standard deduction in retirement. Let me explain what I mean. Many people realize that tax rates are likely to skyrocket in the future so they reflexively convert all of their tax-afford retirement savings to tax-free. Now on the surface, that might seem like a smart move. After all, if Rothek counts can completely shield you from the impact of rising taxes,

5:12why not convert everything? The problem with that approach is that it ignores one important feature of the tax code, the standard deduction. Every year, the IRS allows you to deduct a certain amount of income before you pay any taxes at all. For married couples this year, that amount is 32,200, it's half that amount of your single. Once you hit 65, you get an additional small bonus deduction for good measure. If you convert every dollar of your retirement savings to Rothek counts before retirement, then your standard deduction sits idle. It goes completely unused. In other words, you paid more taxes than necessary along the way, yet overconverted and this could cause you to run out of money sooner than you were planning. But if you leave a portion of your savings in a traditional IRA, you can use your standard deduction to offset the taxes on your required minimum distributions. That makes them completely tax-free. That's what I like to call the holy grail of financial planning. Think about it. You received a tax deduction when you originally contributed the money to your IRA.

6:12That money grew tax-affered for decades while it was invested. Then when you take the money out in retirement, it's completely tax-free because it was offset by your standard deduction. The only other financial tool that can pull this off is a health savings account often called an HSA. HSAs allow contributions to be tax-adductable. The growth is tax-affered and withdrawals can be tax-free if used for qualified medical purposes. But HSAs come with certain restrictions on how the money must be spent. The IRA strategy I'm describing however allows you to use your standard deduction to create tax-free income with far fewer restrictions. So at this point, the question becomes, how much should you leave in your tax-affered investment such that your RMDs are 100% tax-free? From Eric Couples, that amount is about $400,000 and for single filers, it's about half that amount. Now, here's a key point. This strategy works best when it's combined with other tax-free income streams and a perfect retirement plan you may have as many as six different streams of tax-free income.

7:14The first is Roth IRAs, the second is Roth 401Ks, the third is Roth conversions, the fourth is properly structured and funded cash value life insurance. The fifth is requirement of distributions that are offset by your standard deduction and the sixth is social security which can often be received tax-free if your provisional income remains low enough. When these streams of income work together, they create a balanced and comprehensive tax-free retirement strategy. Instead of relying on just one tax-free account, you are taking advantage of every nook and cranny in the IRS tax code. So the next time someone asks you what the best tax-free account for retirement is, you might surprise them with your answer. It may not be just a Roth account, it may actually be a carefully planned IRA distribution that is completely offset by your standard deduction. When combined with other tax-free income streams, it becomes part of a powerful strategy designed to protect your retirement from the impact of rising taxes. Folks, you can order my National Bessily Book, the Guru Gap, how America's financial gurus are leading you astray and how to get back on track on Amazon or wherever you

8:17buy fine books, take the opportunity to order your copy today. By the way, in the next 10 years, I'm looking to put 1 million Americans on the road to the 0% tax bracket if you would like some help implementing a balanced, comprehensive approach to tax-free retirement that shields you from the impact of higher taxes down the road. Head on over to datemagnight.com and click on the Connect with an Advisor button. I'm happy to refer you to an advisor in the Powershaar Network that has been trained, vetted, and qualified personally by me. If you're a financial professional and want to learn how to become a certified powers your advisor, head over to Powershaar.com and opt into my free video series. If you're looking to buy any of my books and single copy, you can do so at Amazon.com. And if you're looking to buy them in bulk, you can do so at datemagnightbooks.com where you can mix and match titles to achieve bulk discounts, but always appreciate it following Twitter. It's Admagnight and Co. Or on Instagram, it's David C. McNight. All right, folks, that's the show for today. I look forward to chatting with you. Time next week.