Tax Advisers Expect More than a Third of Clients to Convert to Roth

March 10, 2010 — A Fidelity Investments study found 40% of investors working with tax advisers are now eligible for Roth IRA conversions, and more than a third (35%) are expected to complete a conversion by year-end. —

The survey of nearly 500 tax advisers found 43% of their clients would benefit from a Roth IRA conversion, given two-thirds (66%) of advisers also think income taxes will generally rise in the future, according to Fidelity. Most (88%) advisers also expect discussions with their clients about Roth IRA conversions will increase during the next six months.

Respondents said they start the conversation more than half (59%) of the time, and 57% of their clients are hearing about the opportunity for the first time. While interest levels are high (89%) after these conversations, advisers said their clients express some reservations about converting to a Roth IRA, with the biggest being the potential tax costs (see “Report Warns of Cost of Roth Conversion”).

According to the survey, half of tax adviser clients are planning to pay for a Roth IRA conversion from the account being converted. In addition, the majority (54%) plan to take advantage of the one-time opportunity this year to split the taxable income between their 2010 and 2011 tax filing years.

Of the 35% of clients who are expected to complete a conversion by year end, the majority (91%) have already started or completed the process. Nearly half (44%) of the conversions are $50,000 or more.

Among tax adviser 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.Rebecca Moore