The Value and Use of the IRA Recharacterization Option

45 Pages Posted: 13 Jan 2011 Last revised: 31 Aug 2016

See all articles by David L. Stowe

David L. Stowe

Ohio University; Ohio University - College of Business; Ohio University - Department of Finance

Andy Fodor

Ohio University

John D. Stowe

Ohio University

Date Written: January 12, 2011

Abstract

The recharacterization option allows IRA owners who convert a traditional IRA into a Roth IRA to choose the better of Roth or traditional treatment (for tax purposes) after returns are known. The authors used option-pricing models to estimate the value of this option and examined strategies to maximize its value. Using a simulation that applies a simple recharacterization strategy over a long time horizon, the authors show its potential value in private wealth management.

Keywords: Recharacterization option, IRA, Roth conversion, Asset allocation, Option Pricing, Retirement Planning

JEL Classification: G11, G13, H31

Suggested Citation

Stowe, David L. and Fodor, Andy and Stowe, John D., The Value and Use of the IRA Recharacterization Option (January 12, 2011). Financial Analysts Journal, Vol. 69, No. 5, 2013, Available at SSRN: https://ssrn.com/abstract=1739175 or http://dx.doi.org/10.2139/ssrn.1739175

David L. Stowe

Ohio University ( email )

Athens, OH 45701-2979
United States

Ohio University - College of Business ( email )

Athens, OH 45701-2979
United States

Ohio University - Department of Finance ( email )

640 Copeland
Athens, OH 45701
United States

Andy Fodor

Ohio University ( email )

514 Copeland Hall
Athens, OH 45701
United States
740.593.0259 (Phone)

John D. Stowe (Contact Author)

Ohio University ( email )

640 Copeland
Athens, OH 45701
United States
(434) 409-0239 (Phone)

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