Fidelity Finds Confusion about Roth Conversion Rules

While investors demonstrated more knowledge about Roth IRAs than last year, many still do not understand the tax implications of a Roth, according to a Fidelity Investments survey.

The survey of investors with both retirement plan assets at former employers and annual household incomes of more than $100,000 showed that awareness of the Roth IRA conversion opportunity has increased over the past six months, but is still relatively low. According to the survey, 35% of respondents are aware of the Roth IRA conversion eligibility changes, up from just 12% in a Fidelity survey conducted in August 2009.

Nearly half (45%) said they know whether their 401(k) assets qualify for a Roth IRA conversion, up from only one-third (33%) in 2009. However, 55% of newly eligible investors who have old 401(k)s with former employers are still not certain whether their assets can be converted to Roth IRAs.

When asked about the biggest barriers to converting assets to a Roth IRA, one-third (33%) of respondents said they do not understand the tax implications of converting to a Roth IRA and 22% are confused by the conversion process itself.

According to Fidelity, before being provided with any information, respondents were asked whether they had ever considered rolling 401(k) assets from a former employer to a Roth IRA, and only 24% said yes. After receiving information about the benefits of a Roth IRA, nearly six in 10 (58%) said they would be likely to investigate converting their 401(k) with a former employer to a Roth IRA and half (50%) said they were considering rolling into one, but had not yet made a decision.