New rules and technology, trends among baby boomers and the Great Recession have led to a burst in Roth individual retirement account conversions.
At Bank of America, conversions to Roth IRAs in the first quarter spiked to about 15,000 from 3,600 a year earlier, and handily topped 2009's total of 8,000. Tax law changes involving income thresholds resulted in roughly 13 million U.S. households becoming newly eligible for conversion to Roths from traditional IRAs or 401(k)s.
The recession also played a significant role in the mass conversion. "Many people unfortunately experienced a depreciation in assets, both personal and retirement, and with the tax law kicking in, many people decided that it made sense with their assets at a lower threshold to pay for the conversion now," said Chuck Toth, director of product management for personal retirement at Bank of America Merrill Lynch.
The influx of baby boomers was also influential. "They are becoming more focused on retirement and what that means for them from a planning perspective," Toth said.
It was the same story at Fidelity Investments, a leading provider of IRAs, which said conversions to Roth IRAs during the first quarter increased dramatically. Fidelity also credited its jump to the assistance of trained financial representatives and the availability of extensive online content and tools. The number of investors seeking guidance from Fidelity on Roth IRA conversions hit a record in the quarter.
"For many investors, the opportunity to consider a Roth IRA conversion is still new with the removal of income restrictions at the beginning of this year, so we encourage all investors to do their homework, including a discussion with a tax adviser, before deciding to convert," said Chris McDermott, senior vice president, investor education, retirement and financial planning at Fidelity.
"When working with an investor to determine whether a Roth IRA conversion makes sense, we often start by examining their overall approach to retirement saving. This includes discussing different strategies — including a Roth IRA conversion — they may consider to potentially improve their overall retirement plan."
For retirement savings overall, 2009 was a bad year. The mix of job cuts, a recession and fear and uncertainty led to a 12% drop in 401(k) sales. Meanwhile, 403(b) plans had a 1% rise in contributions.
401(k) plans are still relatively new. Although they were enacted into law 30 years ago, their use became more prevalent in the 1990s as businesses sought cheaper retirement options for employees, amid the optimistic climate of the stock market boom. After the onset of the financial crisis, many companies stopped matching employees' contributions, though many have since started again.
As popular as the Roth IRA conversion seems to be, it is not without its detractors. "It's amazing to see how different tax advisers approach Roth conversions," said Thomas Joyce of Joyce Financial Management." 'A waste of time and money for anyone over the age of 50' was one memorable quote."
Joyce said that many advisers believe taxpayers will convert now, only to find out down the road that the government will take away the benefits. "What we have found — as usual — is that there is no substitute for walking through the numbers on a case-by-case basis," he said.
Toth agreed, saying that what's important for individuals is they should look into the option and see if it's appropriate. "I think we're in the infancy of people starting to think about this," he said. "It's a new way of diversifying assets from a tax perspective, and it's interesting to see what thinking will come out in respect [to] developing liquidation and distribution strategies."