Assumptions: Figure 1

  1. Starting balances: $65,000 after-tax investments; $250,000 traditional IRA in 1998.
  2. 28 percent income tax rate on distributions for parent; 15 percent for disabled child.
  3. 28 percent Roth conversion tax rate (1998) - $249,000 Roth conversion done in 1998.
  4. 15 percent tax on growth of after-tax investments.
  5. Distributions are not spent by parent.
  6. 6.5 percent rate of return (3.5 percent inflation).
  7. Parent converts traditional to Roth in 1998 - $249,000 (parent age 41; child age 2).
  8. Parent dies at 85 in year 2041 when disabled child is age 46.
  9. Figure shows child stretches retirement plan for 40 years when child is age 86.
  10. Annual expenses for child after parent dies in $138,200 in today’s dollars.
  11. Maximum 401(k) contributions by parent in years 1998 – 2026 (age 70).
  12. Maximum IRA contributions by parent and spouse in years 1998 – 2026 (age 70).
  13. We do not include any government benefits the child has received already or may receive in the future.
  14. In year 2042, when the child is age 46, the child will pay his/her expenses using inheritance.
  15. 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.
  16. 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

  1. 6.5 percent rate of return.
  2. Traditional IRA assets = $500,000 + $152,000 after-tax dollars at death.
  3. Roth IRA assets = $557,000 + $0 in after-tax dollars at death.
  4. Owner dies age 85.
  5. Child inherits at age 54.
  6. In “inflation-adjusted” dollars.
  7. Tax rates = per AGI.
  8. Child Social Security = $25,000 (plus 3 percent inflation).
  9. Expenses = $103,000 [18 years from now (plus 3.5 percent inflation) which is less than $4,650/month in today’s dollars].
  10. Child with traditional IRA runs out of money when he is age 88.
  11. Child with Roth IRA has money through age 100.