Between 1967 and 1973, psychologist Walter Mischel, a professor at Stanford University, conducted what became his famous “marshmallow test” on delayed gratification.

In the study, children were offered a choice between one small but immediate reward (a marshmallow) or two rewards if they waited for a period of time. After explaining the study to the children, the researchers would leave the room for about 15 minutes and then return.

They found that children who were able to wait to get two marshmallows (that is, being able to delay gratification) vs. just eating the one marshmallow right away (that is, giving in to instant gratification) tended to have better life outcomes, as measured by SAT scores, educational attainment, body mass index (BMI) and other life measures.

Many people don’t realize that decades later, researchers attempted to replicate the study results, working with children from a more diverse population that was over 10 times larger than the original study. The new study revealed only half the effect of the original study in terms of delayed gratification on success in life later.

As a result, in 2020, a team of researchers that included Mischel challenged the predictive power of the marshmallow test.

Delayed Gratification Can Pay Off in Investments, Too

So, what does the marshmallow test have to do with the decision to convert a tax-deferred IRA to a tax-exempt Roth IRA? This relates to the benefits you can derive when you forgo a small financial reward today (by paying tax on an investment now) so you can get a greater reward in the future (not having to pay taxes on your investments or the growth they realize. once they’ve grown).

Compared to a traditional IRA, the main advantage of a Roth IRA is that you won’t have to pay income tax on the money you withdraw in retirement.

Here’s an example. If you defer spending $5,000 today and put it away, you can receive a tax deduction for saving that money. However, when you take those funds out in the future, you will pay tax on the $5,000, plus all earnings related to that money’s growth. Many people believe that tax rates will increase in the future. But even if we assume that tax rates stay the same, the benefit of paying the tax today and avoiding it tomorrow is compelling.

Let’s look at what could happen with a hypothetical tax rate of 20 percent. We save $1,000 today by deferring the spending of $5,000. If that $5,000 account grows to $10,000, we will then have to pay $2,000 in taxes in the future.

In contrast, if we converted that money into a Roth IRA, we would not save paying the $1,000 tax today, but we would avoid paying the $2,000 tax in the future. Moreover, any funds taken from a traditional retirement account may impact your Medicare premium and taxation of Social Security.

Future Growth on Funds in a Roth IRA Is Tax-Exempt

Even if you cannot contribute directly to a Roth IRA because your income exceeds the limits set by the IRS, you may be able to do what’s called a ‘backdoor ROTH’. You can also convert a traditional IRA into a Roth. When you convert an existing tax-deferred account to a Roth tax-exempt account, you will pay income tax on the amount you convert, but all future growth will be tax-exempt.

Although converting a traditional IRA to ROTH can impact the tax on your Social Security and your Medicare premium, paying a little tax today could save you many times that amount in the future. Keep in mind that the potential break-even time on converting will depend on your individual circumstances. That is why it’s important to speak with both your financial advisor and your CPA about the potential impact of any IRA conversion or contributing to a Roth instead of a tax-deferred account.

We believe that effective tax rates may rise in the future, in which case deferring taxes may not make sense. Even if tax rates remain the same, having tax-exempt funds can benefit you and your heirs.

Here are three compelling ways in which forgoing a reward now can lead to more rewards later, when you convert a traditional IRA to a Roth IRA:

1. With an IRA, there are mandatory distributions at age 72, while with a Roth IRA, there are not.
2. If your heirs inherit an IRA, they will need to pay income tax, whereas with a Roth account, they will not.
3. When you draw money from a traditional IRA, it is considered taxable income that can raise your Medicare premium and the tax on your Social Security income. When you draw from a Roth IRA, that money is not considered taxable income.

Sometimes, it’s better to resist one marshmallow today so you can get two in the future.

Randy Carver, CRPC^®, CDFA^®, is the president and founder of Carver Financial Services, Inc., and is also a registered principal with Raymond James Financial Services, Inc. Randy has more than 32 years of experience in the financial services business. Carver Financial Services, Inc. was established in 1990 and is one of the largest independent financial services offices in the country, managing $2 billion in assets for clients globally, as of May 2021. Randy and his team, work with individuals who are in financial transition as a result of divorce, retirement, or the sale of a business. You may reach Randy at randy.carver@raymondjames.com.

________

This information does not purport to be a complete description of the securities, markets or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Randy Carver and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors.

Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

The greatest value of a great doctor, CPA, mechanic, financial advisor or other expert is not in treating symptoms or responding to problems but in preventing them from happening in the first place. Just as it’s better to never get sick than it is to treat an illness, it’s better to avoid an IRS audit than to have to respond to one.

Likewise, the true value of trusted financial advisors often is not in the problems we solve, but in the ones we prevent altogether.

If you treat your own medical conditions, do your own taxes or try to handle your own wealth management, you won’t have to pay anyone a fee. Yet the actual cost of doing these things yourself — in terms of time, effort, cost, and inadvertent mistakes — can be extremely high.

For example, if you do your own taxes and end up in an audit with a penalty, the expense (and stress) can take a much higher toll on you than paying a CPA to do a proper return. If you visit your medical team regularly, you might be able to prevent a major medical condition from arising, or at least your team is likely to discover a condition early and treat it. If you avoid seeing your doctor, though, because you want to save money up-front, it could cost you dearly later.

Likewise, a trusted financial advisor can help you minimize taxes, reduce volatility, decrease stress and help you grow wealth consistently. Just as preventive medicine is valuable, so is preventive financial management.

It’s hard to see the value of something that “didn’t happen” — the heart attack you never had or the huge market loss you avoided — because you planned ahead. But believe me, the value is priceless!

Mistakes Can Be Costly

According to the 2020 Natixis Global Survey of Financial Professionals, some of the costliest mistakes that investors made in 2020 are as follows:

• Making financial decisions based on emotion
• Trying to time the markets
• Not understanding risk tolerance
• Failing to consider the tax implications of your financial moves

I have written about these common and costly mistakes before, as well as others. Working with our trusted team of advisors can help you avoid the fallout from mistakes like these.

Work with a Team

When selecting a doctor, a CPA or an advisor, their technical expertise should simply be a given. The most important thing, beyond that, is how comfortable you feel with them. Also, does the person you are thinking about hiring work on his or her own or as part of a comprehensive team that can provide a long-term relationship for you; and ultimately future generations, in case that specialist retires, leaves the company or dies?

Your Advisor Team Can Help You Avoid Underperforming the Markets

Individual investors consistently underperform markets. Our team of trusted advisors can help you avoid this all too common, and often extremely costly, mistake.

Dalbar’s annual Quantitative Analysis of Investor Behavior study measures the effects of investor decisions over short and long-time frames. Dalbar has been conducting the study for 27 consecutive years. Since 1984, the study found that 70 percent of average investors underperformed during 10 key periods of market crisis when they took action, such as buying or selling instead of staying the course.

Dalbar’s 27^th-annual study, released on March 31, 2021, revealed that many investors performed better during the pandemic than they typically do. However, they still underperformed the general market indices, even in 2020, largely because they panicked when things went down and chased when they were going up.

Looking at 10 periods of market drops between September 1986 and October 2008, the study found that eight of those periods would have produced better returns as soon as one year later if investors had just stayed the course, without taking any action.

A trusted advisor can help you avoid the continual issue of trying to time the market, which is futile, and resulting underperformance.

Our Personal Vision Planning^® Process Helps You Stay the Course

We have helped people build and transfer wealth for more than three decades. We have developed and refined a process focused on your personal vision. Ultimately, the true value we add is being here to listen to you, guide you, advise you and help you chart a course, especially through uncertain times. Often, the most important things we do prevent things that would have happened if you had not sought help from us.

Yes, your doctors and your trusted financial advisors will help you try to fix issues that come up, but I encourage you to visit us regularly and follow our guidance, to put you in the best position possible to avoid problems. Our team is a valuable resource to provide solutions, answer questions and, ultimately, help to make your life better.

Being proactive is always wiser than being reactive. Understanding what we can and cannot control, and planning accordingly, are the keys to success. The value a trusted team of advisors brings to you goes far beyond peace of mind. The most important thing they may do is the thing that never happens.

Randy Carver, CRPC^®, CDFA^®, is the president and founder of Carver Financial Services, Inc., and is also a registered principal with Raymond James Financial Services, Inc. Randy has more than 32 years of experience in the financial services business. Carver Financial Services, Inc. was established in 1990 and is one of the largest independent financial services offices in the country, managing $2 billion in assets for clients globally, as of April 2021. Randy and his team, work with individuals who are in financial transition as a result of divorce, retirement, or the sale of a business. You may reach Randy at randy.carver@raymondjames.com.

________

This information does not purport to be a complete description of the securities, markets or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Randy Carver and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors.

Investing involves risk and you may incur a profit or loss regardless of the strategy selected, including diversification and asset allocation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

The Merriam-Webster Dictionary defines volatility as “a tendency to change quickly and unpredictably.” Investopedia defines volatility as “a statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the riskier the security.”

Many people think volatility is when markets or portfolio values go down. But volatility can also refer to when those go up. The market will always fluctuate, and history tells us that it can recover. For example, after the S&P 500 bottomed out in March 2020 following the “Corona Crash,” it then went up nearly 80 percent. And other than a brief downturn in September, the rise went on more or less unabated in terms of corrections.

No matter how we define it, though, volatility can be our friend — something investors can welcome instead of fearing.

With a properly managed, monitored and implemented financial plan, volatility can enhance returns, reduce income tax and ultimately provide more stability to the portfolio. This sounds counterintuitive, right? But it’s true!

Here are three ways we can benefit from volatility.

1. Consider tax swaps

Volatility with individual investments can provide the opportunity for tax swaps. A tax swap is when you sell one investment with capital losses and replace it with a similar, but not identical, investment. You can move out of an investment to try to book a tax loss while immediately reinvesting into the same underlying group of or type of investments. This can be true of either equities (stocks) or fixed income (bonds).

People who simply buy and hold bonds are missing out on the potential benefits of tax swaps. Because of volatility, a buy-and-hold strategy often results in lower returns than a strategically managed portfolio. An experienced advisor can guide you in optimizing your returns.

Does this sound illegal to you? If so, you might be thinking of a wash sale,” which is illegal. A wash sale occurs when an investor sells a security at a loss but then purchases the same or a substantially similar security within 30 days of the sale. The IRS prohibits this! You cannot sell securities at a loss so you can get a tax benefit and then buy the same stock or bond back right away. But a tax swap is legal. That means you invest in a company that’s in the same sector as the investment you sold and use many of the same trading methods.

2. Rebalance from equity to fixed income, or vice versa

Volatility also can provide you with the opportunity to rebalance from equity to fixed income, or vice versa. Although it is impossible to time markets, rebalancing is a way to buy low and sell high without actually doing so. We take a systematic approach to rebalancing, which helps you maintain an asset allocation for your financial needs, so you can achieve a better rate of return over time for any given level of risk. This can provide more stability in your portfolio.

3. Stay focused on your long-term vision

The key is to avoid trying to predict the future or time the market. When the markets go up or down, stay focused on your long-term vision and plan. Take advantage of what’s happening in the market within the context of your overall goals and plan. Ultimately, the only return that is important is the net return — the return on your investment after fees, expenses and income tax.

Our team has developed and refined our Personal Vision Planning ® process over the past 30 years for uncertain times like today. This process provides you with a customized wealth-management plan based on you and your long-term vision.

The pace of change with technology, and ultimately the markets, continues to accelerate. Our team uses cutting-edge technology to monitor and rebalance portfolios. We believe technology should not be a replacement for an experienced advisor who understands what you are trying to accomplish. Instead, technology is a tool and is just one part of the arsenal an advisor or team brings to the table.

Please contact me personally, or any member of our team, if you would like to discuss your portfolio, if you have questions or if we can otherwise be of service. As always, your vision is our priority.

________

Randy Carver, CRPC^®, CDFA^®, is the president and founder of Carver Financial Services, Inc., and is also a registered principal with Raymond James Financial Services, Inc. Randy has more than 32 years of experience in the financial services business. Carver Financial Services, Inc. was established in 1990 and is one of the largest independent financial services offices in the country, managing $2 billion in assets for clients globally, as of February 2021. Randy and his team, work with individuals who are in financial transition as a result of divorce, retirement, or the sale of a business. You may reach Randy at randy.carver@raymondjames.com.

________

This information does not purport to be a complete description of the securities, markets or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Randy Carver and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors.

Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.