Tags: IRA | Roth | savings | retirement

Fidelity: Roth IRA Conversions Are Surging

By    |   Thursday, 07 Nov 2013 12:32 PM

Fidelity Investments says it's witnessing a surge in the number of Americans seeking the tax benefits of Roth IRAs.

A Roth IRA allows an individual to give up the tax deduction on contributions now in return for tax-free withdrawals during retirement.

Due to income restrictions, some people are not eligible to contribute directly to Roth IRAs. But anyone can use conversion, transferring funds from a traditional IRA to a Roth IRA, as a “back door,” says MarketWatch.

And according to Fidelity, a growing number of people are doing just that.

“We’ve seen monthly conversions regularly coming in higher than last year by 10 percent to 15 percent,” Ken Hevert, vice president of retirement products at Fidelity Investments, told MarketWatch.

“We expect that trend to continue,” he added.

Through Oct. 31, the company's conversion activity was 12 percent higher than the same period last year. That's more than double the conversion rate seen in 2009, MarketWatch points out.

Fidelity manages about 2 million investor accounts and MarketWatch said the company is often viewed as a bellwether for retirement saving trends.

Hevert attributes the current Roth conversion trend largely to growing awareness about the option.

Roth IRAs have been available for well over a decade, but up until 2010, conversions were also subject to income restrictions.

According to Daily Finance, the trend is nearly a year old, and the surge was born from the desire for tax benefits. Roth IRA conversions are one of several tax strategies that became increasingly popular late last year, the website notes.

Fidelity reported 52 percent more Roth conversions in the last month of 2012 than it saw in December 2011, says Daily Finance. Overall for 2012, the conversion rate rose 12 percent.

Roth IRAs are essentially a gamble on tax rates. Individuals who believe their rate will be higher during the retirement years can save if the funds are taxed now.

During normal tax years, these accounts are not as attractive to many people because they have no logical reason to accelerate their income, so they don't take advantage of the opportunity to covert their retirement savings, Daily Finance explains.

But last year, people were looking ahead to 2013, which was set to deliver higher tax rates.

Many people moved to increase their taxable income for 2012, taking the hit while rates were low. Doing so allowed them to avoid bigger tax bills later and lock in savings for the rest of their lives, says Daily Finance.

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Fidelity Investments says it's witnessing a surge in the number of Americans seeking the tax benefits of Roth IRAs.
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2013-32-07
Thursday, 07 Nov 2013 12:32 PM
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