Bounded Rationality Strikes Again: The Impact of Cognitive Ability and Financial Planners on Roth IRA Adoption and Ownership

60 Pages Posted: 7 Dec 2011 Last revised: 9 May 2014

See all articles by Benjamin F. Cummings

Benjamin F. Cummings

The American College of Financial Services

Michael S. Finke

The American College

Russell N. James

Texas Tech University

Date Written: March 22, 2013

Abstract

Roth IRAs were introduced in the late 1990s and provide another option for tax-sheltered retirement savings. Because determining the benefits of a Roth IRA is a complex decision, we hypothesize that cognitive ability and having a financial planner have significant impacts on the timing and likelihood of using a Roth IRA. Using data primarily from the 2004 and 2008 administrations of the National Longitudinal Survey of Youth (NLSY), we find that greater cognitive ability and having a financial planner are both positively related to Roth IRA ownership and earlier adoption. If individuals with higher cognitive ability and/or a financial planner are better able to recognize and implement beneficial tax strategies, then tax policy will yield unintended distributional consequences. The complexity of a tax policy also limits its ability to modify individual behavior in the ways envisioned by policymakers.

Keywords: cognitive ability, financial planner, Roth IRA, National Longitudinal Survey of Youth (NLSY)

JEL Classification: D14, D83, H24

Suggested Citation

Cummings, Benjamin F. and Finke, Michael S. and James, Russell N., Bounded Rationality Strikes Again: The Impact of Cognitive Ability and Financial Planners on Roth IRA Adoption and Ownership (March 22, 2013). Available at SSRN: https://ssrn.com/abstract=1968984 or http://dx.doi.org/10.2139/ssrn.1968984

Benjamin F. Cummings (Contact Author)

The American College of Financial Services ( email )

270 S. Bryn Mawr Avenue
Bryn Mawr, PA 19010
United States

Michael S. Finke

The American College ( email )

Bryn Mawr, PA 19010
United States

Russell N. James

Texas Tech University ( email )

2500 Broadway
Lubbock, TX 79409
United States

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