As tax season gets into full swing many investors are taking a closer look to determine whether a Roth IRA conversion is right for them.
On Wednesday Fidelity Investments announced that a survey of almost 500 tax advisors revealed that 40% of investors working with tax advisors are eligible for a Roth IRA conversion now that income limits have been removed, and 35% are expected to complete a conversion by the end of this year.
Of that 35%, advisors report that 91% have already started or completed the process and 44% of the conversions are $50,000 or more.
Before Jan. 1, only individuals with modified adjusted gross incomes of $100,000 or less were eligible to convert assets from a traditional IRA or a 401(k) with a previous employer to a Roth IRA.
The survey found that 43% of advisors believe their clients would benefit from a Roth IRA conversion and 66% think income taxes will generally rise in the future. Eighty-eight percent expect discussions with their clients about Roth IRA conversions will increase during the next six months.
Fidelity, which has assets under administration of nearly $3.2 trillion, including managed assets of nearly $1.5 trillion as of Jan. 31, said in a press release that the study’s results coincide with an increase in investor interest in Roth IRA conversion guidance in January.
Last year, Fidelity launched its Roth Conversion Evaluator, which the Boston company said gets close to 1,000 investors and advisors each day using the tool. In March, Fidelity said that it plans to introduce a “Tax-Smart Investing” seminar at its branches nationally, as well as new educational content on its website and at Fidelity WealthCentral, its technology platform for independent financial advisors.
“As this is a complex decision, it's encouraging that investors are engaging financial services providers and tax advisors to develop an overall retirement plan and discuss the potential benefits of a Roth IRA conversion,” Chris McDermott, a senior vice president, investor education, retirement and financial planning at Fidelity, said in a press release.
According to the survey, among tax advisor clients who are likely to convert to a Roth IRA this year, half will be converting all eligible assets from accounts such as a Traditional IRA or 401(k) with a former employer. Fifty-four percent plan to split the taxable income between their 2010 and 2011 tax filing years.
Also Wednesday, Charles Schwab [SCHW] announced it is offering additional resources and tools to investors, independent investment advisor clients, and 401(k) plan participants to help navigate the decision making process about Roth IRA conversion. Schwab recently launched an Online Quick Assessment which explores whether a Roth IRA conversion might make sense for an investor after asking a few simple questions about current retirement accounts, expected time horizon to retirement, estate plans, and conversion taxes.
Schwab also produced a webcast entitled, Roth Conversion -- Is it Right for You?, featuring Mark Riepe, a senior vice president at the Schwab Center for Financial Research, explaining Roth IRA fundamentals.
But a Roth IRA conversion is not right for everyone. If a client will be in a lower tax bracket in the future, a Roth IRA doesn’t make sense since the client will be paying taxes on a much lower level of income. And if a client is nearing retirement and will need to dip into the funds soon a conversion may not make sense since one of the advantages of the Roth is that an individual doesn’t have to start taking required minimum distributions from it once they turn 70 1/2 as they would with a traditional IRA.
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