The Power of Zero is a great book detailing the importance of being strategic with the allocation of your money. It outlines how an individual can work toward achieving the 0% tax bracket in retirement by using the right mix of taxable accounts, tax-deferred accounts, and tax-free accounts.
About the Author
The author, David McKnight, published the book in 2018. A graduate of Brigham Young University, he has helped many individuals implement retirement strategies aimed at minimizing future tax liabilities. McKnight has also been featured on Bloomberg Radio and Investor’s Business Daily.
What I learned
Before reading The Power of Zero, I had already made up my mind to prioritize accounts that allow my money to grow tax-free for retirement. I made this decision because I believe I’m currently in one of the lowest tax brackets I’ll ever be in—and delaying taxes until retirement comes with the risk that tax rates could be significantly higher by then.
After reading the book, I feel validated in my decision. However, I did notice one shortcoming in my original approach: by paying all taxes upfront now, I wouldn’t be taking advantage of the standard deduction in my retirement years. In the book, McKnight suggests that the ideal amount to keep in your tax-deferred account is the amount you can withdraw annually without exceeding the standard deduction, since distributions become mandatory after age 73 due to Required Minimum Distributions (RMDs).
One caveat: we wouldn’t want our distributions to trigger taxes on Social Security benefits. To avoid this, provisional income must remain below certain thresholds:
| Filing Status | First Threshold | Second Threshold | Taxability of Social Security |
|---|---|---|---|
| Single | $25,000 | $34,000 | 50% to 85% |
| Joint | $32,000 | $44,000 | 50% to 85% |
Provisional income includes distributions from tax-deferred accounts, taxable interest (e.g., 1099 income), wages, and half of your Social Security benefits. For those nearing retirement, it’s essential to consider these thresholds when deciding how much to keep in tax-deferred versus other account types.
That said, the future of Social Security is uncertain. As of now, benefits paid out exceed the interest income earned by the Social Security Trust Fund, and projections suggest the fund could be depleted by 2033. For this reason, I do not factor Social Security into my retirement planning.
A Quick Glimpse Into My Strategy
I currently contribute to a Roth 401(k) sponsored by my employer, who matches contributions up to about 5% of my salary. I also have a high-deductible health plan, which makes me eligible to contribute to a Health Savings Account (HSA). Additionally, I have an unfunded Roth IRA and a money market account for savings. I plan to open a Traditional IRA so that I can eventually use my standard deduction to offset withdrawals, keeping my effective tax rate at 0%.
David McKnight emphasizes that the ideal balance in your tax-deferred account should be just enough so that your RMDs align with the standard deduction. Let’s explore what that number looks like.
The standard deduction for 2024 is $14,600 for single filers. From 1970 to 2024, the deduction grew at an average rate of about 4.9% annually. Using a more conservative estimate of 3% inflation over 50 years, the projected standard deduction could be around $64,000 for single filers in the future.
RMDs are calculated by dividing your account balance by your life expectancy at the start of withdrawals. A woman aged 72 has a life expectancy of 14.56 years, but I rounded to 15 for simplicity. To calculate the account size needed to produce a $64,000 RMD:
$64,000 × 15 = $960,000
This is equivalent to about $218,983 in today’s dollars when adjusted for 3% inflation over 50 years.
So, How Much Should You Contribute to Reach This Goal?
Assuming:
- An average annual return of 8%
- 45 years of contributions (planning to retire at 60 but continue contributing until age 67)
You’d need to contribute $2,483.79 per year to grow your Traditional IRA to $960,000 by age 73.
Key Takeaways from The Power of Zero
- Don’t keep more than 6–12 months of savings in taxable accounts (e.g., high-yield savings, money market funds, deposit accounts).
- Always take full advantage of your employer’s 401(k) match.
- Tax-free accounts like Roth IRAs, Roth 401(k)s, and LIRPs (Life Insurance Retirement Plans) are critical to reaching the 0% tax bracket in retirement.
- It’s great to save for retirement—but it’s even better to do it in a way that minimizes your future tax burden.