As tax season goes into full swing, advisers are finding many investors interested in Roth IRA conversions.
A recent Fidelity Investments survey of almost 500 tax advisers found that 40% of investors working with tax advisers are eligible for a Roth IRA conversion now that income limits have been removed and 35% were expected to complete a conversion by yearend. Of the 35%, advisers reported that 91% had already started or completed the process; 44% of the conversions were of $50,000 or more. Before Jan. 1, only people with modified adjusted gross incomes of $100,000 or less were eligible to convert assets from a traditional IRA or a 401(k) account with a previous employer to a Roth IRA.
The survey, which was released Wednesday, said that 43% of advisers believed their clients would benefit from a Roth IRA conversion and 66% thought income taxes will generally rise in the future.
Nearly 90% expected more discussions with their clients about Roth IRA conversions during the next six months.
Fidelity, which has assets under administration of nearly $3.2 trillion, including managed assets of nearly $1.5 trillion at Jan. 31, said in a press release that the study's results coincided with a January burgeoning of investor interest in guidance on Roth IRA conversions.
Last year Fidelity introduced its Roth Conversion Evaluator; nearly 1,000 investors and advisers use it each day, the company said.
This month the company is introducing a Tax-Smart Investing seminar in its investor centers nationwide, as well as educational content on its Web site and at Fidelity WealthCentral, its technology platform for independent financial advisers.
"As this is a complex decision, it's encouraging that investors are engaging financial services providers and tax advisers to develop an overall retirement plan and discuss the potential benefits of a Roth IRA conversion," Chris McDermott, the senior vice president, investor education, retirement and financial planning at Fidelity Investments, said in a press release.
The survey report said that, among tax advisers' clients who are likely to convert to a Roth IRA this year, about 54% planned to split the taxable income between their 2010 and 2011 tax filing years.
Also on Wednesday, Charles Schwab Corp. announced it is offering additional resources and tools to investors, clients of independent investment advisers and 401(k) plan participants to help them weigh the decision-making for a Roth IRA conversion. Schwab recently introduced an Online Quick Assessment that explores whether a Roth IRA conversion might make sense for an investor, based on the answers to a few questions concerning current retirement accounts, expected time horizon to retirement, estate plans and conversion taxes.
Schwab also produced a Webcast titled "Roth Conversion — Is it Right for You?", featuring Mark Riepe, a certified financial adviser and a senior vice president in the Schwab Center for Financial Research, explaining Roth IRA fundamentals.
But a Roth IRA conversion is not right for everyone.
If a prospective customer will be in a lower tax bracket in the future, a Roth IRA does not make sense, since the client will pay taxes on a much lower level of income. And if a client is nearing retirement and will need to dip in to the funds soon, a conversion may not make sense since one advantage of the Roth account is that people do not have to start taking required minimum distributions from it once they turn 70 and a half years old, as they would with a traditional IRA.
