Personal Finance


April 30, 2010


Half of IRA savers won't make Roth conversions, Putnam says

More than half of U.S. savers with taxable individual retirement accounts won't convert to a tax-free Roth type because they aren't convinced about the tax savings, according to a Putnam Investments LLC survey.

The study, which polled 1,001 Americans with retirement accounts from April 2 through April 7, found that 56 percent would not convert their traditional IRA to a Roth IRA, according to the Boston-based money manager. Two-thirds of respondents said they weren't sure that paying the taxes now would save them money in the future, the survey said.

"You could be wrong on whether taxes are going up or down," said Jeff Carney, head of retirement and global products at Putnam, which has $8.7 billion in IRA assets. "There's not going to be any perfect decision here because there are things you're not going to control that are going to take place."

The Internal Revenue Service lifted income restrictions this year on converting a traditional IRA to a Roth IRA, meaning U.S. taxpayers making more than $100,000 a year in adjusted income can make the change. Those who switch from a traditional IRA, where taxes are paid only on withdrawals, to a Roth IRA, must pay income taxes upfront in exchange for tax-free withdrawals during retirement.

There is skepticism that government may change the rules regarding tax-free withdrawals from Roth IRAs, said Christine Fahlund, senior financial planner for Baltimore-based T. Rowe Price Group Inc. "If that happened, you would have accelerated your tax payments unnecessarily," she said.

Fidelity Investments said conversions to Roth IRAs increased fourfold in the first quarter of 2010 to 58,000, compared with the same period last year. The Boston-based firm declined to say how many IRA accounts it manages, said spokesman Michael Shamrell.

Tax shield

T. Rowe Price reported nearly 5,800 investors shifting $188 million in assets to a Roth IRAs in the first quarter of 2010, which represents a "very small fraction" of such accounts, said spokesman Robert Benjamin in an e-mail. The firm declined to give the number of its IRA accounts.

Withdrawals from Roth IRAs are tax-free and the accounts don't require distributions once holders reach 70 and a half like traditional IRAs. Roth IRAs may also be passed on to heirs and grow tax-free, Fahlund said. A Roth IRA may help shield investors from future higher tax rates, she said.

In 2011, income tax rates for the highest earners will go to 39.6 percent, up from 35 percent, and the capital gains tax will rise to 20 percent from 15 percent, unless Congress acts. Distributions from traditional IRA accounts are taxed at ordinary income rates, according to the IRS.

Capital gains

In 2010 only, taxpayers who convert may report half the income in 2011 and half in 2012 unless they choose to pay the entire levy this year, according to the IRS.

A taxpayer in the top income bracket with an IRA worth $1.2 million would pay 35 percent or $420,000 in federal taxes when converting the account into a Roth IRA and paying this year.

Investors who are deciding whether to convert are worried there may be a tax on distributions from Roth IRAs in the future, said Mickey Cargile, managing partner at WNB Private Client Services in Midland, Texas, with about $700 million in assets under management.

"The distrust of the government is a huge issue right now along with its lack of financial stewardship," Cargile said. "It's certainly a major concern."

About 37 million American households held a traditional IRA as of May 2009, compared with 17 million households with a Roth IRA, according the Investment Company Institute, a Washington-based mutual-fund trade group. Traditional IRAs held an estimated $3.72 trillion in assets and Roth IRAs held about $215 billion at the end of last year, according to ICI.

The Putnam survey was conducted by InsightExpress, a research firm based in Stamford, Conn., which polled online a nationwide sample of Americans age 22 and above. About 36 percent of respondents had incomes above $100,000, Putnam said.


April 30, 2010