EPISODE #004

Roth IRAs and Marshmallows: Delayed Gratification and Intentionality

“You never see a U-Haul behind a hearse.”
 – Denzel Washington & others

Jesse Itzler and the “I-Factor”:

1. Laying the Groundwork
   • Time slows down when you are learning and doing new things
   • You’ll be dead soon enough! So, don’t worry as much about what other people think.
   • We trick ourselves into thinking “There’s plenty of time in the future, and we’ll just do it then.”
   • Each person has the same 24 hours in a day, 7 days in a week, etc. However, we are not guaranteed any of that time in the future.

1. Reframe time and intentionally ‘seize’ it along the way
   • If the average person lives to age 78
   • And they are 70 years old
   • And you see then 2x each year
   • Instead of 8 years, you have 16 visits left to spend with them
2. Takeaways
   • Challenge the typical ‘Work hard, delay, then take it easy later’ mindset.
   • Recognize a relevance and sense of urgency for some of the most important things and intentionally enjoy the journey along the way.
   • Instead of 8 years, you have 16 visits left to spend with them
3. (2) BIG QUESTIONS:
   • Who do you want to spend that time with & what do you want to do?
   • What do you want to accomplish in that time?

The Marshmallow Experiments

• Kids given a choice: (1) Marshmallow (or cookie) now – OR – (2) if they wait 15 minutes
• As adults, the kids that waited tended to have better educational histories and life outcomes

Roth IRA vs. Traditional IRA: a modern-day marshmallow experiment
Not as ‘clear cut’ & depends on a number of factors. Not all nuances are covered here for clarity.

• Roth contributions are not tax deductible
• Roth distributions are tax free
• Can contribute at any age within income thresholds (‘backdoor’ options are beyond the scope here)
• Roth IRAs have no Required Minimum Distribution requirements

EXAMPLE

• Age 40 and married
• Modified Adjusted Gross Income $210,100
• Standard deduction $25,100
• Taxable Income $185,000
• 24% marginal Federal tax bracket + 3.4% Indiana state tax bracket = 27.4%
• Assume rates do not change
• Roth IRA: Contribute $6,000 & pay tax from outside account of $1,644i. Assume 10% growth to age 67 (27 years) = $78,660 (tax free)
• Traditional IRA: Contribute $6,000 (and invest additional $1,644 in a taxable account)i. Assume 10% growth to age 67 (27 years)
  1. Traditional IRA $78,660 (taxable)
  2. Taxable Account $1,644 + $19,909 growth – $3,663 tax = $17,890
• Breakeven = $17,890/$78,660 = 22.7% marginal tax ratei. Less the 3.4% Indiana rate = 19.3% marginal Federal rate
• Roth IRA is a ‘good deal’ for taxable income in retirement at the 22% bracket ($81,050) and above.

General Comments

• Be careful with ‘exact’ predictions about the future. Its better to be ‘approximately right, vs. precisely wrong’.
• Consider a mix of Taxable Accounts, Pretax Accounts, and After-tax (Roth) Accounts in your overall financial plan – be better prepared for unknown future tax related decisions.

Resources

Marshmallow Experiment –

• https://www.youtube.com/watch?v=XcmrCLL7Rtw
• https://www.youtube.com/watch?v=4y6R5boDqh4
• https://www.npr.org/sections/health-shots/2018/09/21/650015068/remembrance-for-walter-mischel-psychologist-who-devised-the-marshmallow-test

Roth IRAs (IRS website) – https://www.irs.gov/retirement-plans/roth-iras

BOOK – Living with a SEAL: 31 Days Training with the Toughest Man on the Planet Kindle Edition by Jesse Itzler

BOOK – Living with the Monks: What Turning Off My Phone Taught Me about Happiness, Gratitude, and Focus Kindle Edition by Jesse Itzler