Case Study 2: Convert $2M for Grand Kids

Roth IRA Conversion Case Studies

This case study serves to prove that for high net worth individuals and and savers who won’t outlive their retirement nest eggs, “It’s all about time.”  The graphs in the case study that follows make it simple to see why I came to this conclusion.  However, “simple” is not  a term I’d use to describe the background information one must comprehend to draw this conclusion.   

Case Study 2:

The variables are the same as those in Case Study 1 except the individual IRA owner and his/her spouse appoint their grand children as the next generation beneficiary after each other. The grand children’s age and gender when they start to receive periodic distributions are: 34/Male, 30/Female, and 28/Male; their respective life expectancies are: 76, 80 and 75; and their assumed MTR applicable to pre-tax distributions is 15% (their effective MTR considering the IRD deduction).


Commentary Make that “tens of millions!” More time to compound in Roth’s tax free environment means more money!

There’s no change to the relative outcome of these examples as long as: 1) the RORs for the pre-tax and Roth accounts are same; and 2) the blended ROR for the side fund is always lower than these accounts on a net after-tax basis (since it’s still subject to capital gains tax at whatever rate you assume).

This favorable outcome is ultimately achieved because it’s impossible for a taxable side fund to perform as well as the tax-free Roth if one assumes comparable risk factors attributable to the selected investments. For example, a very conservative after-tax investor might earn 4-4.5% in a tax-free bond; whereas, with a comparable level of risk, that same investor could earn 5.5-6% tax-free by investing in a taxable bond within the Roth environment.

It’s the differential in the rates of return on investments in the Roth environment versus anywhere else and the extent of time to compound these additional gains (facilitated by the Roth’s option to super-stretch payments to heirs) that proves that for high net worth individuals and savers who won’t outlive their retirement nest eggs: It’s all about time.”

To access background information relevant to this conclusion, go to: Save to Retire: Pre-tax, After-tax or Roth?; Stretch v. Super-stretchPre-tax v. Roth Estate Tax Issues (considers Income in Respect of a Decedent); Roth 401(k) Case Studies

Copyright © 2009 Barry R. Milberg   All Rights Reserved

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