Younger investors are converting to Roth IRA’s in greater numbers than those nearing retirement, according to a report by Fidelity Investments.
Compared with last year, the Boston-based company said that it is seeing a major shift from older to younger investors making Roth IRA conversions.
The percentage of households with investors between the ages of 35 and 49 who completed a Roth IRA conversion doubled from 31% in 2010, up from 15% in 2009. At the same time, the number of households with customers age 50 and over that completed a Roth IRA conversion fell from 75% to 55%. Meanwhile, retirees over the age of 65 had the largest decline in Roth IRA conversions, with a 19% drop from 2009 to 2010.
Part of the reason may be that if investors are in their 20s or 30s, they have many years of tax-free growth if they convert to a Roth IRA. In addition a young person’s peak earning years are most likely in the future, meaning it’s a good decision to pay any tax obligation now when the tax rate is presumably lower.
“While it’s encouraging to see investors in their 30s and 40s take advantage of a Roth IRA conversion as a potential ‘hedge’ against possibly higher federal income tax rates in the future, it’s important that investors who are nearing or in retirement consider a conversion for other reasons,” said Chris McDermott, senior vice president, investor education, retirement and financial planning for Fidelity, in a press release. “These older investors also need to weigh other key tax efficiency factors – including estate planning and the possibility of being affected by the new upcoming Medicare surtax – which all could potentially influence a Roth IRA conversion decision.”
Meanwhile, Roth IRA conversions remain high. 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. Since these income limits were removed, the volume of Roth IRA conversions at Fidelity in the first half of 2010 was four times higher than in the first half of last year, with a total of nearly 100,000 Roth IRA conversions.
Investors demanding guidance on the conversions remained strong as well. Since Fidelity’s Roth Conversion Evaluator calculator launched in October, it has had more than 167,000 visitors, according to the company. Traffic to Roth IRA conversion content on Fidelity.com increased more than threefold in the first half of this year compared to last year.
McDermott expects investor interest in Roth IRA conversions across all age groups to increase towards the end of the year.