Strategies for Maximizing Estate Wealth

Abstract

The conventional wisdom that using tax-sheltered accounts such as Keogh plans, IRAs, 401(k) programs, etc. is an excellent way to save for retirement but a poor way to accumulate an estate is shown to be incorrect at least under a variety of reasonable circumstances. It is shown that net estate wealth (i.e., after income and estate taxes) generally will be greater by saving in such plans compared to saving in conventional (i.e., taxable) accounts. The misconception arises because the net wealth left after taxes on two estates of equal size at death will be less when a significant part of the assets are in tax-sheltered plans, but this is not a fair comparison because if all other factors (e.g., income and consumption during the accumulation period, pre-tax rates of return, etc.) are held constant, the estate associated with the tax-sheltered investment will unequivocally be larger at the time of death. It is also shown that saving in tax-sheltered plans during the early years of the lifecycle, followed by saving in a taxable account in the later years, will generate a maximum after-tax transfer to heirs.