Roth conversions vs stretch IRA

Stretch IRA Replacements: Life Insurance vs. Roth Conversions

Replacements for the Stretch IRA: Life Insurance or Roth Conversions

Replacements for the Stretch IRA need to be considered. Life insurance is one idea to replace the Stretch IRA. Roth Conversions are another option to consider.

In a separate piece, I mention CRUTs as Stretch IRA Alternatives.

Let’s look at Life Insurance and Roth Conversions now to replace the Stretch IRA. 


Replacement Options for the Stretch IRA 

If you have extra Required Minimum Distributions (RMDs) that you don’t need in order to support yourself during retirement, what can you do with them?

  1. Brokerage Account

Option one is to take the RMDs as they come out and invest them in a brokerage account. You heir will get a step up in basis when you die. You, however have to pay taxes on the dividends and interest while you are alive.

  1. Partial Roth Conversions

Option two is to do partial Roth Conversions. If your heirs are in high tax brackets, it may make sense to pay taxes on the IRA money now so that the heirs inherits tax free Roth money.


stretch IRA replacement with Roth conversions

Figure 1 (Roth Conversion amount and account balances)

In figure 1, you can see suggested conversion amounts. The right three columns show the account balance for the brokerage account, the IRA, and the Roth. By age 87 they are able to convert (and spend) the entire IRA down to zero, leaving a large Roth IRA.


  1. Permanent Life Insurance

Permanent Life Insurance has a bad reputation in physician finance circles. There are accepted uses for whole life insurance. Is legacy one of them? Can you leverage Required Minimum Distributions to leave a larger amount to your heirs?

Let’s look at Guaranteed Universal Life Insurance (GUL). This is supposedly the cheapest, most effective way to build a death benefit. Rates of return (IRR for those in the know) are about 5%. Of course, they are much higher than that if you die early, but let’s assume a 5% rate of return for the sake of argument. Also, second to die policies are easier to get with less underwriting and less expensive as well. Second to die means the death benefit is not activated until the second spouse dies. This is what you usually want anyway for legacy, as the remaining spouse has access to the accounts until death.

In this case, we can get a $2M policy for yearly premiums of $62,000. Over twenty years, the internal rate of return is 5% on these numbers.


Life Insurance As a Stretch IRA Replacement

For this scenario, I looked at low assumed returns (7% for stock and 4% for bonds) as well as high assumed returns (9% for stocks and 5% for bonds).


life insurance Stretch IRA replacement

You can see the low and high return assumptions on the left. Then there is No plan, the partial Roth conversion plan, and the second to die GUL plan. Account types and total assets left are on the top.

While the partial Roth conversion plan has 6.3% less assets than the GUL plan ($400,000), both the GUL and No plan have an almost $2M IRA remaining that the heir will have to pay taxes on at ordinary tax rates. Ouch.

No plan has more than $2M more than GUL in the brokerage account. The GUL has a $2M death benefit that is included in the totals above.

With the high rates of return assumption, the GUL does even worse since it returns at 5%. Using a financial calculator, the IRR for the brokerage account with the high return assumptions is 15.6%. This is despite a 60/40 portfolio is paying 9%/5%.  One would expect that 0.6(9) + 0.4(5) = 7.5. However, remember the RMDs are also going into the brokerage account so the money weighted return (or IRR) is actually 15.6% for the account. Smokin’. For the low return assumption, the IRR was 9% rather than the time weighted 5.8%


Conclusion: Stretch IRA Replacements Life Insurance Vs Roth Conversions

Life insurance doesn’t really stack up as a replacement for the Stretch IRA. When comparing life insurance to Roth Conversions, I know which I would use!

Partial Roth conversions seem like a worthwhile idea as a replacement for the Stretch IRA.



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One Comment

  1. I’m thinking gifts. You can gift 15k per spouse for each kid, equaling the 60K / yr you would pay to insurance for 2 kids. Some of that can go into a kid’s Roth, some into a brokerage, over a couple decades quite a bit can be transferred and it will inflate nicely. When the bitter end comes then they will settle with the government, but smaller IRA’s will mean smaller taxes since much IRA money has already been transferred.

    The cost is a bigger WR during your life, a 100K retirement turns into a 160K retirement. The reality is the older you get the more retirement is amenable to a higher WR. At age 62 age 92 is 30 years away. At age 72 it’s only 20 years away, so a similar size nest egg can rationally be more aggressively pilfered. My retirement is spread between SS, TIRA (only a small 500K account), Brokerage with tax loss harvest, and Roth. The Roth is designated as self insurance and the rest as retirement income, so the Roth is closed to withdrawal and therefore SORR. The TIRA is designed to be a small annuity like account that throws off regularly increasing amounts based on the RMD schedule so between SS and TIRA the taxes are optimized to the 12% bracket for 15 to 20 years. If you’re 72 at RMD that takes you to 87 to 92. The TIRA is scheduled to have money till age 115 so it can be accelerated in withdrawal a little but still in the 12% (to the top of the 12%), taxes paid and the extra gifted. This would run the TIRA out of money sooner and raise the tax burden some but would get cheap money to the kids rather than to some insurance company. In the mean time thr Roth stays closed and grows unmolested. When the TIRA runs dry then the appreciated Roth is opened to take up the slack and by then you’re very old and the Roth is big so the wealth transfer can continue. Since the brokerage is not liable to SECURE shenanigans. It is transferred as property with step up in basis so it’s dissolution can occur over decades,

    The bottom line is MAX OUT YOUR PRETAX may not be the mantra to follow. It may be equivalent to MAX OUT YOUR TAX BILL ONCE YOU CROAK. In my case I quit donating to pretax at age 50 and aggressively invested in my brokerage. I thinks this is the correct maneuver. It throws a monkey wrench into FIRE if you’re expecting to leave some dough to the future generation and not just a bif honkin tax bill

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