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Is the Stanford Marshmallow Test a Harbinger of Roth Investing?

In the 60’s and 70’s, Stanford professor/psychologist performed an experiment on 7 to 9-year olds.  In the test, Professor Mischel offered the children one marshmallow.  If they didn’t eat the marshmallow now, they would receive two marshmallows later.  In this test of postponing instant gratification, Mischel discovered the children who were patient and waited for the larger reward, achieved more remarkable accomplishments later in life.  They tended to achieve better SAT scores, higher educational status, and a lower body mass.

In a way, that is what a Roth IRA/401K is like.   An investor forgoes an immediate tax deduction now, but never has to pay tax on the appreciation in the Roth IRA or Roth 401k.   A Roth is synonymous with a Swiss bank account.   Distributions are tax-free and do not affect the tax on social security, alternative minimum tax, nor does it push investors into a higher tax bracket.  But many investors, addicted to immediate tax savings, forgo the two marshmallows and greater benefits for the rest of their lives.

 While a traditional 401k or IRA defers the tax on an investor’s wages and appreciation, a Roth 401k or Roth IRA converts future appreciation to tax-free status.   Additionally, while a 401k or IRA requires the investor to start liquidating their account, and paying tax after 70 years of age; a Roth 401k or Roth IRA allows investors to continue tax-free growth for their entire lives and to leave an income tax-free legacy to their heirs. (Traditional and Roths are still subject to estate tax.)

 Sounds pretty simple?  But what are the downsides of Roths?  Give us a call or send a message we will gladly help you determine what makes the most sense for you based on your financial goals.    

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