Assumptions: Figure 1
- Starting balances: $65,000 after-tax investments; $250,000 traditional IRA in 1998.
- 28 percent income tax rate on distributions for parent; 15 percent for disabled child.
- 28 percent Roth conversion tax rate (1998) - $249,000 Roth conversion done in 1998.
- 15 percent tax on growth of after-tax investments.
- Distributions are not spent by parent.
- 6.5 percent rate of return (3.5 percent inflation).
- Parent converts traditional to Roth in 1998 - $249,000 (parent age 41; child age 2).
- Parent dies at 85 in year 2041 when disabled child is age 46.
- Figure shows child stretches retirement plan for 40 years when child is age 86.
- Annual expenses for child after parent dies in $138,200 in today’s dollars.
- Maximum 401(k) contributions by parent in years 1998 – 2026 (age 70).
- Maximum IRA contributions by parent and spouse in years 1998 – 2026 (age 70).
- We do not include any government benefits the child has received already or may receive in the future.
- In year 2042, when the child is age 46, the child will pay his/her expenses using inheritance.
- Since this is 20 years from now, we used $275,000 in annual expenses for the disabled child which equates to $138,200 in today’s dollars or $11,500/month.
- Inheritance taxes, estate taxes, and any state income tax on a Roth conversion have not been included in the analysis as Pennsylvania does not tax retirement distributions.
Assumptions: Figure 2
- 6.5 percent rate of return.
- Traditional IRA assets = $500,000 + $152,000 after-tax dollars at death.
- Roth IRA assets = $557,000 + $0 in after-tax dollars at death.
- Owner dies age 85.
- Child inherits at age 54.
- In “inflation-adjusted” dollars.
- Tax rates = per AGI.
- Child Social Security = $25,000 (plus 3 percent inflation).
- Expenses = $103,000 [18 years from now (plus 3.5 percent inflation) which is less than $4,650/month in today’s dollars].
- Child with traditional IRA runs out of money when he is age 88.
- Child with Roth IRA has money through age 100.