As the National Debt increases, the burden of paying for it will likely fall on the shoulders of the American taxpayers. Because taxes are expected to go up in the future, people with their retirement savings in tax-deferred accounts such as 401(k)s or IRAs, are heading toward a substantial tax bill coming due once they start using those retirement accounts for income.
In this episode of Money Script Monday, Kevin presents a financial vehicle that allows you to grow your money tax-deferred and use it for retirement income tax-free.
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Hey there. This is Kevin Nuber, thank you so much for watching today's Money Script Monday video, where I'm going to be talking about why you should consider paying taxes now because taxes are historically low.
Let's say you're going to go out and buy something that you know that you need to buy, and it's somewhere out into the near future.
Let's say you're going to buy a TV or something that's more than just an incidental purchase.
Any reasonable consumer is going to go out, they're going to shop it around, they're going to look on the internet, they're going to compare prices, they're going to look for the absolute best possible deal that they can find.
But now let's say that after looking around, you find the price for the TV that you want and it's not cheap enough, it's just not there yet.
It's summertime and right around the corner is Black Friday. So, if you just wait until Black Friday, that the price on that television is going to be as cheap as it's ever going to be.
If you just wait it out a little bit, that's exactly when you should buy that television.
Black Friday sales are the biggest sales event of the year. And what I want to say to everybody today, is that today taxes are as low as they've ever been.
It's like a Black Friday sale.
This might be the least amount of money that you ever pay on taxes on your taxable accounts, that you might consider doing it today.
You have all your money in a 401(k) or IRA or someplace that out in the future on the day that you retire, you're going to start drawing the money out, paying those taxes.
But you have the ability to do it now and put it somewhere tax-free and pay those taxes at a substantial discount.
U.S. Debt Clock
Let's talk about why we think that taxes today are on sale. So first off, I want to talk a little bit about the National Debt.
If we look at the National Debt today in 2020, the National Debt is 25.3 trillion.
Now, if you go to this website usdebtclock.org, there's a really cool calculator that shows you exactly what the debt is at the present time.
I guarantee you, whenever you watch this video, this number will be completely out of date and the debt will be much more than $25.3 trillion.
For example, if we went back into the past, we can look back into the year 2000. And we can see that the National Debt was $5.7 trillion.
Fast forward 8 years from then until 2008, which is the last time that we had some sort of financial crisis, then it was $10 trillion, so pretty much double.
Fast forward 12 years later into 2020 and it's more than doubled to $25.3 trillion.
So, the question I have for everybody watching this video is what do you think the National Debt is going to be in the future?
Well, there's some projections actually. And if we look forward into 2024, then we have a couple different scenarios that we're looking at.
First, if we project forward, the best-case scenario, which is this bottom line, the National Debt 4 years from now will be $28 trillion. A trillion dollars is a unfathomable amount of money.
We have no idea how to comprehend that. But $28 trillion is an equally difficult number to understand. And this best-case scenario is based on the average of the last five years just projected forward.
The worst case scenario, is what if we do take the spending that we've spent this year, which is the most spending that we've ever had over such a short period of time, the most amount of debt that we've ever taken on, if we project that forward for the next 4 years, then we're looking at a National Debt of $41 trillion.
That's a pretty substantial increase.
The reason why this is important for everybody to understand is because when any entity whether it's a government, a business or a person borrows money, there always has to be some sort of collateral that's posted in order to secure that loan.
So, you go buy a home or you go get a mortgage from a bank, your actual physical property, the house and the land it's on is the collateral that you post in order to secure the loan.
If you default on it, they take the house and the bank's happy.
So, the question I have is, what is the collateral for the US government to secure the $28 or $41 trillion in debt that we're going to be having in the future?
The answer is you. It's your ability to pay taxes.
Each and every taxpayer has the liability right now presently of $203,000 per taxpayer which is more money than and average person has less money than that in their 401(k)s, IRAs and retirement accounts.
So, they have borrowed more money on your behalf than you have in your savings accounts on average.
If the National Debt goes up to $41 trillion, we're talking about that number doubling per taxpayer.
This is a huge risk for every single person that has their money in a tax deferred account where they're going to be postponing the taxes on that account to some point in the future.
Taxes Are on Sale
Because we believe that today that taxes are on sale. This is the biggest sale that we've ever had.
And there's a few reasons why.
First, is that tax rates are historically low. If you look at overtime and you look at all the different marginal tax rates, today is as low as it's ever been.
There might be one or two periods of time in the past where your particular bracket might have had a slightly less tax rate. But overall, in general, this is the lowest the taxes have ever been.
That's the first reason why. The second reason is, is think about the accounts you're going to pay taxes on your 401(k)s, your IRA balances.
What has the market done over the last few months? Has your IRA or 401(k) balances are worth less today?
So, if you were to take the money out and pay taxes on it, it's a smaller amount of money that you're paying the taxes on. Tax rates are low, and the amount that you're actually paying the taxes on is actually low.
The third reason is because people's incomes are less right now. Unfortunately, tens of millions of people are unemployed.
People who are employed are taking less hours. And even people who are fully employed are going to make less money this year because of the current state of the economy.
So that puts you at a lower tax bracket than you're normally in.
For these three reasons combined, it is like Black Friday for paying taxes. Taxes will never be as low for you, potentially, then any other period of time in the future.
And the question is, what do you think the future tax rates are going to be?
We've talked about exactly what the National Debt is looking like, which is not very good, and the liability per taxpayer.
So, if you think the taxes are going to stay low, and the sale is going to go on for a long time, then that's just not reality.
It's not a political argument anymore, but most people believe that taxes have to go up.
Tax Free Asset Allocation
The only way that this actually would make sense is to pay taxes on a taxable account is if you take that money and put it somewhere that's completely tax-free.
You can never pay taxes on that money ever again in your life. You not take it out of one taxable place and then pay the taxes and put it somewhere else that's taxable again, that wouldn't make sense.
So, you have to allocate your money and put it into an account that's tax free.
Just like if we knew that the market was going to be volatile and it was about to crash, we would take our money out of the market and put it somewhere safe.
It's the same thing with taxes. If we know that taxes are going to go up drastically, why are we keeping our money in this taxable account?
We need to take it out and move it over and put it somewhere else.
And really, there's only a couple places that you can put, the government doesn't want you to put a bunch of money inside tax-free accounts.
The only places that you can do it is a Roth IRA, or Roth 401(k).
The quickest and easiest way would be to take your IRA balance, convert it by paying the taxes on it, you don't have to do the entire balance, you can take it out systematically in a series of distributions to keep your tax bracket really low.
And you don't push yourself into a really high tax bracket and then put it into a Roth IRA, so that's never taxed again.
The second way is putting into a life insurance policy. A life insurance policy is completely tax-free.
It's just like Roth IRA in that it can grow tax-free, and when you take it out, it's tax-free. And when you pass away, the death benefit transfer's tax-free.
There's no rules and limitations on how much you can put in. So this is also a great place that you can put your money completely tax-free.
Now, I said at the beginning of this presentation that it's hard for all of us to fathom exactly what a trillion dollars is.
So, I want to give you an example of exactly how much a trillion dollars is.
This dollar bill is extremely thin. And if I took a trillion of these, and I stacked them on top of each other, just like this, one on top of another, then how big of that stack would that be?
If I had trillion $1 bills? The answer is that stack would go around planet Earth more than two times. That is how much a trillion dollars is.
And our National Debt is potentially $28 to $41 trillion in the future. So for this reason, that is why we're saying that taxes today are as low as they've ever been.
And today is like Black Friday for taxes. Thank you so much for watching.
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