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
Date Written: March 22, 2013
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: Suggested Citation