Fidelity Finds Confusion about Roth Conversion Rules

April 28, 2010 ( - Fidelity Investments finds that more than half (55%) of newly eligible investors who have old 401(k)s with former employers are not certain whether their assets can be converted to Roth IRAs.

The survey of investors with both retirement plan assets at former employers and annual household incomes of more than $100,000 showed that awareness of the Roth IRA conversion opportunity has increased over the past six months, but is still relatively low. According to a press release, currently, 35% of respondents are aware of the Roth IRA conversion eligibility changes, up from just 12% in a Fidelity survey conducted in August 2009.

Investors’ knowledge of whether their 401(k) assets qualify for a Roth IRA conversion also has increased. Nearly half (45%) now say they know whether or not such assets can be converted to an IRA versus only one third (33%) in 2009.

When asked about the biggest barriers to converting assets to a Roth IRA, one third (33%) of respondents said they do not understand the tax implications of converting to a Roth IRA and 22% are confused by the conversion process itself.

According to Fidelity, before being provided with any information, respondents were asked whether they had ever considered rolling 401(k) assets from a former employer to a Roth IRA, and only 24% said yes. Survey respondents were then given a detailed description of the benefits of a Roth IRA, including the potential for earnings to grow federally tax-free, if certain conditions are met; the ability for contributions to be withdrawn penalty-free and tax-free at any time by the account holder or heirs; the absence of required withdrawals at any age during the lifetime of the original owner; and the January 2010 conversion eligibility changes. After receiving the information, nearly six in 10 (58%) said they would be likely to investigate converting their 401(k) with a former employer to a Roth IRA and half (50%) said they were considering rolling to one, but had not yet made a decision.

Fidelity offers several education tools, including: