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FIDELITY® STUDY FINDS INVESTORS LACK BASIC UNDERSTANDING OF ROTH IRA BENEFITS, AS ROTH IRA 2010 CONVERSION OPPORTUNITY NEARS

Nearly Nine Out of 10 Investors Unaware of Conversion Opportunity

BOSTON, September 29 /PRNewswire/ — With income limits being removed for Roth IRA conversions in just three months, a Fidelity Investments® study1 released today finds that many investors are still struggling to understand the fundamental benefits of a Roth IRA. Additionally, 88 percent are unaware of the 2010 Roth IRA conversion opportunity.

A Roth IRA is an individual retirement account that has some distinct differences over other IRAs (i.e., Traditional, SEP and SIMPLE IRA). Contributions to a Roth IRA are not tax deductible, but an investor’s money can grow tax-free, with the ability to take tax-free withdrawals in retirement. When introduced more than 10 years ago, eligibility requirements restricted investors with certain income levels from utilizing a Roth IRA. Beginning January 1, 2010, income limits are being lifted2 for investors who want to covert non-Roth retirement assets, like those found in a Traditional IRA or 401(k) with a former employer, into a Roth IRA.

Fidelity believes that most investors should consider having a Roth IRA as part of their overall retirement plan to help minimize taxes and maximize retirement savings. However, the study finds that although more than half (56 percent) of those surveyed say they are confident they understand the benefits of a Roth IRA, their actual knowledge of features and the federal tax-free growth and withdrawal advantages is lacking. For example, many investors did not correctly answer when asked if:

  • Contributions are tax deductible (28 percent answered incorrectly) or if investment gains and income are tax free (20 percent) and can be withdrawn tax free after age 59 ½ (32 percent)
  • Withdrawals need to be made starting at age 70 ½ (66 percent) or if contributions may continue after age 70 ½ (70 percent)
  • Money may be used for a first-time home purchase (57 percent) or college education (62 percent)

“This survey highlights that many investors first need to understand the benefits of a Roth IRA before they can consider if a conversion is right for them,” said Chris McDermott, vice president, Fidelity Investments. “It also reinforces how important investor education will be in helping individuals to evaluate their specific needs around this complex decision.”

Fidelity offers several Roth IRA education tools on Fidelity.com, including the IRA Evaluator (www.fidelity.com/tvr), which highlights the differences between Roth and Traditional IRAs.

Investors Cite Several Perceived Barriers to Conversion, But Considering Options

When examining the potential future actions of investors, many say they are willing to investigate a Roth IRA conversion for a 401(k) left with a former employer or other IRA (55 percent), such as a Traditional, SEP or SIMPLE IRA. However, when asked about the biggest obstacles to converting, respondents cite their lack of understanding as the most significant barrier, but also listed others. For example:

  • Approximately one third of investors indicate they do not understand a Roth IRA conversion’s tax implications (34 percent) or the tax structure of a Roth IRA itself (30 percent)
  • Nearly a third (30 percent) say their balances are too small for a conversion or they lack sufficient funds (27 percent) to cover the conversion tax costs
  • One in five (20 percent) do not believe a Roth IRA fits their needs

These barriers may be contributing to current intention rates, as only 7 percent of investors surveyed say they plan to convert to a Roth IRA now.

“Considering that a Roth IRA offers tax-free withdrawals and growth potential, analysis done by Fidelity indicates that most investors should consider having one as part of their overall retirement plan to help minimize taxes and maximize retirement savings,” said McDermott. “We believe if investors have at least 10 years before making withdrawals, anticipate a higher tax rate in retirement or plan to leave savings to heirs, they should consider a conversion.”

Preparing for Potential 2010 Conversion

Given that the existing income limits will not be lifted until January 1, Fidelity encourages newly eligible investors to consider taking advantage of the next few months to create or review their retirement savings plans and start to determine how they will pay for the taxes that will result from a conversion.

Due to the complexity of the decision, it’s important that investors seek guidance when evaluating whether a Roth IRA conversion is right for them. When asked, 51 percent of respondents indicated that they would look to their financial advisor or accountant for information; 35 percent would seek help from a representative of their financial institution; and 32 percent would use online resources. As well, Fidelity recommends that all investors also consult their tax advisor.

To help investors determine if a Roth IRA conversion is right for them, Fidelity published a Viewpoints article on Fidelity.com in September that outlines three key criteria when considering the decision with a tax advisor. This article addresses the critical question of when investors should pay taxes on their retirement assets and is available at www.fidelity.com/rothpov. Fidelity has representatives who can help investors with the decision making process both on the phone at 1-800-FIDELITY or in-person at any one of the 132 investor centers across the United States.

About Fidelity Investments

Fidelity Investments is one of the world's largest providers of financial services, with assets under administration of $3.0 trillion, including managed assets of more than $1.4 trillion as of August 31, 2009. Fidelity offers investment management, retirement planning, brokerage, and human resources and benefits outsourcing services to over 20 million individuals and institutions as well as through 5,000 financial intermediary firms. The firm is the largest mutual fund company in the United States, the No. 1 provider of workplace retirement savings plans, the largest mutual fund supermarket and a leading online brokerage firm. For more information about Fidelity Investments, visit www.fidelity.com.

Fidelity, Fidelity Investments and the Pyramid design logo are registered service marks of FMR LLC.

Neither Knowledge Networks nor Data Star, Inc. is affiliated with Fidelity Investments.

The results of the Fidelity Roth IRA Conversion Study may not be representative of all retirement plan owners meeting the same criteria as those surveyed for this study.

Fidelity Brokerage Services LLC, Member NYSE, SIPC
900 Salem Street, Smithfield, RI 02917

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1Data was collected between 8/14/09 and 8/28/09, by Knowledge Networks and Data Star, Inc., through a national online survey of 800 retirement plan owners, half of whom have household incomes of $100,000 a year or more.
2Roth IRA income limits for annual contribution restrictions will still apply.