Schwab Survey Reveals That Nearly Three Quarters of People Impacted by Roth IRA Conversion Rule Changes Plan to Consult a Financial Advisor

According to Survey Investors Lack Understanding of Roth IRAs and Majority Do Not Currently Plan to Take Advantage of New Conversion Rules in 2010

Monday, October 12, 2009 9:00 am PDT



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SAN FRANCISCO--(BUSINESS WIRE)--In less than 90 days many investors will have a new IRA opportunity when the income restriction for converting to a Roth IRA is lifted. The rule change will make all investors eligible to convert assets from certain retirement savings accounts, such as a traditional IRA or a 401(k) with a previous employer, to a Roth IRA, regardless of income level. Until January 1, 2010, only people with modified adjusted gross incomes of $100,000 or less are eligible to convert.

A recent survey from Charles Schwab & Co., Inc., finds that nearly three fourths (72 percent) of Americans making more than $100,000 annually are not planning to convert to a Roth IRA, despite the pending changes in eligibility. But a lack of certainty about the benefits of a Roth IRA and confusion over the pending Roth IRA conversion rule changes appear to be leading a significant number of investors to seek help and guidance from professional advisors. Of the 400 Americans with incomes of $100,000 or more surveyed, only 14 percent indicate that they are extremely confident in explaining the Roth IRA conversion rule changes set to take effect, but 71 percent say they would be likely to consult with a financial advisor. Forty-nine percent say they would consult a tax planner.

“While the Roth IRA conversion rule changes will present an opportunity for certain investors, people should weigh the costs and the benefits unique to their own specific situation before deciding if a conversion is right for them,” said Bryan Olson, CFA, vice president, head of portfolio consulting for Schwab. “At Schwab, we are seeing an increasing number of people asking us whether or not they should consider converting to a Roth IRA. We are also proactively reaching out to clients on the topic, because we know that the majority of people are unaware of the pending rule changes.”

Olson added, “At Schwab, we are using this opportunity to talk with investors about how a Roth IRA might fit into their broader retirement savings strategy, which is the long-standing approach we have always taken when consulting clients on a variety of financial topics.”

Additional key findings in the Schwab survey include:

  • Nearly two-thirds (61 percent) of high-income Americans surveyed are unaware of the 2010 Roth conversion rule changes.
  • More than one quarter (26 percent) of those aware of the conversion opportunity find it more confusing than healthcare reform.
  • Thirty-four percent of respondents say that they are unsure of the general benefits of a Roth IRA versus a traditional IRA.
  • Thirty-two percent of respondents currently have a Roth IRA as part of their retirement savings strategy.
  • Of the survey respondents that currently have a Roth IRA, 50 percent say their primary motivation is the benefits of tax-free investment growth.

Five Factors to Consider before Making the Move to a Roth

“Two common reasons for people to consider converting to a Roth IRA are to achieve a greater ending portfolio value or to capture estate planning benefits, but there are some additional factors to take into account,” noted Olson. “For example, converting to a Roth IRA probably doesn’t make sense for people who can’t afford to pay the resulting income taxes out of other savings.”

Key Roth IRA conversion considerations include:

  1. Expected future tax rate: It is important to consult a tax professional, but if you think you’ll be in the same or higher income tax bracket, paying taxes on the amount you convert in today’s lower tax rate environment could be a real retirement advantage. But if you think you’ll be in a lower income tax bracket, the taxes you pay today could end up being higher than the taxes you’d pay when you’re ready to make withdrawals.
  2. Time horizon to retirement: If you have at least five years to leave the assets in the Roth IRA, there’s more time for potential tax-free growth and a better chance of recouping the initial cost of paying taxes on the conversion amount. However, if you withdraw before five years after the conversion and are under 59 1/2 you will incur a 10 percent early withdrawal penalty.
  3. Ability to pay income taxes: You will have to pay income taxes on the conversion amount, so decide how much you can afford to pay from a non-IRA account. To help control the amount of taxes due, you can make a partial conversion or take advantage of the rule allowing you to recognize the conversion income over the 2011 and 2012 tax years. If your only source of cash is to tap your IRA, you’ll lose the potential benefit of tax-free growth on that amount, and if you’re under 59 1/2 and draw on your IRA, you’ll also incur a penalty. Only 12 percent of respondents to Schwab’s survey are concerned that they don’t have enough money to cover the taxes they would owe at conversion.
  4. Impact on current tax rate: The amount you convert will be taxed as additional income so it’s important to consider whether you’ll be bumped into a higher bracket as a result. If so, you can choose to convert only the amount that allows you to stay within the same tax bracket or conduct multiple conversions over multiple years.
  5. Estate planning objectives: Income taxes aside, very high net worth individuals may find that converting part or all of a traditional IRA to a Roth advantageous for estate-planning purposes, especially if they have a significant IRA balance that they do not need to tap in their lifetime. While the value of a Roth IRA will still be included in a person’s gross estate, because there are no required minimum distributions, the account could grow larger than it otherwise might under traditional IRA distribution rules. This can leave more for heirs to withdraw income tax-free over their lifetimes. In addition, the income tax paid at conversion (preferably from assets other than the IRA) will reduce the owner’s gross estate. In effect, the account owner is prepaying income tax on behalf of future beneficiaries without such payment being recognized as a taxable gift.

Additional tools and online resources including a Roth IRA Conversion Calculator, Roth IRA conversion Q&As, and key considerations for Roth IRA conversions are available on Schwab’s Roth-dedicated site: Schwab will continue to add information and resources to the site as the January 1, 2010 conversion rule change date approaches.

This information is for general information purposes only and is not intended as a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends you consult with a qualified tax advisor, CPA, financial planner or investment manager.

About the Survey

The Charles Schwab Roth Survey was conducted by Kelton Research between September 3 and September 14, 2009 using Random Digit Dialing of listed and unlisted numbers. Results of any sample are subject to sampling variation. The magnitude of the variation is measurable and is affected by the number of interviews and the level of the percentages expressing the results. In this particular study, the chances are 95 in 100 that a survey result does not vary, plus or minus, by more than 4.9 percentage points from the result that would be obtained if interviews had been conducted with all persons in the universe represented by the sample.

About Charles Schwab

The Charles Schwab Corporation (Nasdaq:SCHW) is a leading provider of financial services, with more than 300 offices and 7.6 million client brokerage accounts, 1.5 million corporate retirement plan participants, 646,000 banking accounts, and $1.3 trillion in client assets. Through its operating subsidiaries, the company provides a full range of securities brokerage, banking, money management and financial advisory services to individual investors and independent investment advisors. Its broker-dealer subsidiary, Charles Schwab & Co., Inc. (member SIPC,, and affiliates offer a complete range of investment services and products including an extensive selection of mutual funds; financial planning and investment advice; retirement plan and equity compensation plan services; referrals to independent fee-based investment advisors; and custodial, operational and trading support for independent, fee-based investment advisors through its Advisor Services division. The Charles Schwab Bank (member FDIC) provides banking and mortgage services and products. More information is available at (1009-11271)

© 2009 Charles Schwab & Co., Inc. All rights reserved. Member SIPC

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