Roth IRAs: A Bust for Baby Boomers

ADVERTISEMENT

BOSTON (TheStreet) — Are Roth IRAs really a boon for Boomers?

While many financial firms are hopeful that new rules for Roth IRA conversions — in particular, the removal of past income limits — will prove popular, there's skepticism offered by a newly released study.

According to a survey by financial-services company USAA, Baby Boomers who own IRAs and can now convert to a Roth IRA, more than half (58%) are aware of the changes, up from 39% in August. Still, 70% don't plan to make a conversion in 2010 and 17% are "unsure" if they will.

When survey participants were asked why they wouldn't convert, 44% said they believe their income tax rates will be lower in retirement, and they don't want to pay higher taxes by converting funds now; 35% received a recommendation from a tax adviser or financial planner to not convert; and 27% aren't able to pay the taxes that would be due on the converted funds.

USAA provides financial products and services to 7.4 million members of the U.S. military and their families. The survey, which wasn't limited to military families, polled 1,384 individuals, 692 of whom own a traditional or Roth IRA.

"It is a positive sign that some people are consulting financial advisers to determine if a Roth IRA conversion makes sense, but we are surprised by how many investors are gambling on future income-tax rates to make this decision," says Ken Kilday of USAA Wealth Management. "The combination of today's historically low income-tax rates and the flexibility to pay taxes on the converted funds in 2010 — or to split it between 2011 and 2012 — should encourage more investors to work with a financial expert to explore whether making a full or partial conversion this year will help them meet their long-term financial goals."

Having more information about the benefits of a Roth IRA (48%) and a better understanding of how the conversion process works (46%) may lead respondents to change their mind. More than a third (39%) said having funds handy to pay the tax bill would help make the conversion decision easier.

Despite USAA's findings, large firms are nevertheless seeing brisk business from Roth IRAs.

For discount broker Charles Schwab (Stock Quote: SCHW), Roth IRA conversions were more than three times higher in the first two months of 2010 than in the same period last year, and the amount of assets exchanged was 14 times higher. At fund-management firm Fidelity Investments, there were 19,000 conversions in January, four times that of the same month in 2009.

According to Fidelity, 40% of investors working with tax advisers are eligible to take advantage of the recent removal of income limits for Roth IRA conversions, up from 13% last year, and more than a third (35%) of those clients are expected to complete a conversion by the end of the year. Nearly half (44%) of its conversions since January have been for $50,000 or more.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

Show Comments

Back to Top