This episode of The Power of Zero Show revolves around a recent Ray Dalio video in which he issued warnings about the U.S. debt crisis.

In the clip, Dalio appears to be giving America three years to get their act together and to right the fiscal ship of state.

Dalio mentions the draft of his new book that goes through the mechanics of the debt – and highlights the supply-demand problem he believes will occur if the deficit doesn’t go from the current 7.2% of GDP to about 3% of GDP.

Dalio touches upon what people should do when there isn’t an adequate supply-demand balance.

He believes that looking back at history will show you that the current problems are the results of history repeating itself.

A recession isn’t the one thing Dalio is afraid of… the breakdown of the monetary order is!

Host David McKnight talks about the bid other countries may have on the U.S. fiscal debt, as well as the related crisis of confidence of sorts.

According to a recent Penn Wharton study, if the U.S. doesn't right their fiscal ship of state by 2040, no combination of raising taxes and/or reducing spending will arrest the financial collapse of the nation.

David believes that in the next 10 to 15 years, the U.S. is likely to need huge infusions of capital to avoid a financial collapse, the likes of which we haven’t seen since the Great Depression.

What should you do? If you have the lion’s share of your Retirement Savings, IRAs or 401(k)s, you need to act now while tax rates are historically low.

Since we’re on the cusp of Trump extending his tax cuts for another 8 years, it’s important to know that, if you count 2025, we’ll have historically-low tax rates for another 9 years.

David is in favor of taking action before tax rates increase, also because he believes that, come 2034, tax rates aren't going to simply revert back to what they were in 2017.

If the American fiscal ship doesn’t get right on time, we could go back to seeing high tax rates that were part of the past – such as 94% in the last two years of World War II, or 89% as it was throughout the entire decade of the 70s.

Mentioned in this episode:

David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track

DavidMcKnight.com

DavidMcKnightBooks.com

PowerOfZero.com (free video series)

@mcknightandco on Twitter

@davidcmcknight on Instagram

David McKnight on YouTube

Get David's Tax-free Tool Kit at taxfreetoolkit.com

Ray Dalio

Penn Wharton

David McKnight looks at why many people wait until the fourth quarter to do a Roth conversion, the potential penalties, and what can be done to avoid having to pay underpayment penalties to the IRS.

David begins the episode by highlighting the fact that a lot of investors wait until Q4 before they do a Roth conversion – and they prefer to pay taxes on it in cash instead of simply having the taxes withheld by the IRS.

From a mathematical standpoint, it’s the correct thing to do because it allows you to get 100% of the converted dollars into your tax-free account.

However, if you didn’t pay quarterly taxes on that income evenly throughout the year, the IRS can charge you an underpayment penalty!

The IRS’ safe harbor rules can spare you from any underpayment penalty for a Q4 Roth conversion, if certain requirements are met…

David goes over two scenarios in which you wouldn’t have to pay an underpayment penalty, as well as when, and why, you may need to file Form 2210 A1.

Make sure to familiarize yourself with Form 2210 A1 because, as David puts it, it will “become your best friend if you’re hoping to avoid underpayment penalties on a fourth quarter Roth conversion.”

Mentioned in this episode:

David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track

DavidMcKnight.com

DavidMcKnightBooks.com

PowerOfZero.com (free video series)

@mcknightandco on Twitter

@davidcmcknight on Instagram

David McKnight on YouTube

Get David's Tax-free Tool Kit at taxfreetoolkit.com

Form 2210

In today’s episode, David McKnight focuses on whether you should do a Roth conversion, how much you should convert per year, and whether it’s possible to over-convert to Roth.

David explains that an effective tax rate is the actual percentage of your income that you pay in taxes after accounting for deductions, exemptions, and credits.

For David, the only reason you should do a Roth conversion is if you believe that your effective tax rate in retirement will be higher than your marginal tax rate today.

David touches upon a couple of reasons why your effective tax rate in retirement could be higher than your marginal tax rate today.

Remember: the national debt is projected to be $57 trillion by 2035. If Trump extends his tax cuts, you can layer another $5 trillion right on top of that…

According to a recent Penn Wharton study, if the U.S. doesn't right its fiscal ship of state by 2040, no combination of raising taxes or reducing spending will arrest the nation’s financial collapse.

Before undertaking your Roth conversion strategy, you have to remember that in retirement, absent any other deduction, the IRS will give you a deduction called standard deduction.

The standard deduction is $30,000 if you retired today as a married couple and $15,000 as a single filer.

David illustrates a scenario that can lead you to fall into the Roth IRA over-conversion trap.

Your goal should be to keep your balance in your IRA or 401(k) low enough that required minimum distributions in retirement are equal to or less than your standard deduction, but also low enough that they don’t cause Social Security taxation.

David has done the math: if you don’t have a pension or other residual taxable income, you want to keep between $300,00 and $400,000 in your 401(k) or IRA in retirement.

Got a sizable pension or another significant source of taxable income? Then, your ideal balance would be much closer to zero.

It’s crucial that, when converting your money, you do it slowly enough that you don’t rise into a tax bracket that gives you heartburn, but quickly enough that you get all the heavy lifting done before tax rates go up for good.

If Trump ends up extending his tax cuts, they’ll expire at the end of 2033. That means that somewhere between 2034 and 2040 tax rates will likely rise in dramatic fashion.

By including the 2025 tax year, that gives you nine full years during which you can execute your Roth conversion strategy.

Mentioned in this episode:

David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track

DavidMcKnight.com

DavidMcKnightBooks.com

PowerOfZero.com (free video series)

@mcknightandco on Twitter

@davidcmcknight on Instagram

David McKnight on YouTube

Get David's Tax-free Tool Kit at taxfreetoolkit.com

Donald Trump

Penn Wharton