What do Roth Conversions & Marshmallows have in Common?

By: Philip "Flip" O'Toole

In Angela Duckworth’s 2016 book titled Grit: The Power of Passion and Perseverance, the author posits that resilience, and a little elbow grease are more important to long-term success than talent. Throughout the book, she references a “delayed gratification experiment” conducted by Walter Mischel beginning in the 1960’s which came to be known as The Marshmallow Experiment.

Mischel observed 550 pre-school children over several years. The experiment was simple. An experimenter would give a preschooler a marshmallow with the following instructions. They let the child know they were about to leave the room, and if the child resisted eating the marshmallow, the experimenter would reward the child with a second marshmallow upon their return. The experimenter would then leave the room for 15 minutes.

The 550 children were then sorted into two groups based on the results. Group 1 was the children who were able to resist the temptation of eating the marshmallow and received the reward of a second marshmallow. Group 2 was the children who just could not help themselves and ate the first marshmallow. Each group was then studied over several years. The results of the study were nothing short of astounding.

Many years of observations revealed that Group 1 exhibited more self-control in frustrating situations, yielded less to temptations, were less distracted when trying to concentrate, were more intelligent, self-reliant, confident and trusted their own judgement. Group 1 had higher SAT scores, more successfully reached their long-term goals, had lower drug use, were more fit and maintained longer, healthier relationships with a partner.

So, what does this have to do with Wealth Management?

One of the strategies we present to clients is to consider taking advantage of the years between when they choose to stop working (generally in their late 50’s or early 60’s), and before the IRS requires them to start taking their “Required Minimum Distributions” from their Qualified Retirement Accounts (beginning at age 73 or 75 depending on the year they were born). We then present a strategic and efficient method of moving dollars from tax-deferred accounts (Traditional 401k’s & IRA’s) to tax-free accounts (Roth IRA’s) in a tactical way that minimizes the cost and maximizes the benefit. Each family’s situation is uniquely different, but we are finding in many cases that this maneuver can have a significant and lasting impact on wealth both during our client’s lifetimes and for the next generation.

Repurposing tax-deferred dollars now into tax-free dollars to be used later requires delayed gratification. It is somewhat of a modern-day Marshmallow Experiment for Gen X and Boomers because it requires choosing to pay taxes now to potentially receive financial benefits later. It reminds me of the Bill Gates quote, and I’ll paraphrase:



“People always overestimate the rate of change in the short-term, but underestimate the magnitude of change in the long-term”

In other words, it is difficult for humans to feel the benefits of change in the short-term, however they are often blown away later by the magnitude of the change over the long-term.

Our experience is that the primary challenge of this strategy for clients is emotional. Just like it is difficult for a preschooler to resist eating a marshmallow, it is difficult for adults to cut a bigger check to Uncle Sam on April 15th. However, like the results of the Marshmallow Experiment, we believe clients who choose delayed gratification with this strategy, improve their odds of long-term success. So, it is not the talent, knowledge or even the empirical data that allows clients to take advantage of the strategy. It is grit. How gritty are you?