Fidelity Finds Confusion about Roth Conversion Rules

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potential for earnings to grow federally tax-free, if certain conditions are met; the ability for contributions to be withdrawn penalty-free and tax-free at any time by the account holder or heirs; the absence of required withdrawals at any age during the lifetime of the original owner;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:

• an IRA Evaluator at http://www.fidelity.com/tvr, which explains the differences between Roth andTraditional IRAs;
  
• a Roth Conversion Evaluator at http://www.fidelity.com/rothevaluator, which helps investors determine whether or not a full or partial Roth IRA conversion makes sense for them in the context of their overall retirement plan; and 
• Fidelity Viewpoints articles about Roth IRA conversions that provide clear guidance on the topic, at http://www.fidelity.com/viewpoints.