Beware Of The COVID-19 Tax Freight Train

By Susan Rupe InsuranceNewsNet

There’s a tax freight train coming your clients’ way – and their individual retirement accounts and 401(k) accounts are on the tracks.

That was the word from David McKnight, Million Dollar Round Table Top of the Table qualifier and author of The Power Of Zero. McKnight spoke about the impact of COVID-19 relief legislation on the federal deficit and what it all means for your clients’ future taxes during an online town hall meeting held by the National Association of Insurance and Financial Advisors on Monday.

McKnight specializes in strategies that will get clients into a 0% tax bracket by the time they retire. He shared some tips on how to keep federal taxes from taking a bite out of your clients’ retirement accounts.

The U.S. national debt reached a record high of $24.2 trillion in April, and that’s not taking into account the nearly $2 trillion in federal spending resulting from the CARES Act. That and other COVID-19 stimulus spending that is in the works will lead to higher taxes in the future, McKnight said. Why? “The government served the dessert before they served the spinach – they promised more than they can deliver,” he said.

As a result, federal income tax rates are expected to move from the current historic lows to what McKnight called “a day of reckoning” in 2026, when he expects tax rates to begin going up.

That looming tax increase is what McKnight calls “the tax freight train.” The good news is that advisors and their clients have a few years to begin repositioning assets to tax-free vehicles.

“We’re at a time of historically low tax rates and our assets are depressed,” he said. “So there’s no better time than now to begin moving some assets into tax-free buckets.”

McKnight recommended several approaches to generate multiple streams of tax-free income for clients. They include:

Roth IRAs and Roth 401(k)s.
Life insurance retirement plans. He particularly recommended plans that give clients the ability to withdraw their death benefits to pay for long-term care.
Reducing the tax exposure that comes with required minimum distributions.

In addition, McKnight noted that Social Security “can shield your clients from sequence of returns risk.”

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected]. Follow her on Twitter @INNsusan.