USAA Survey finds many Boomers consider Roth IRA Conversions too taxing

SAN ANTONIO--(BUSINESS WIRE)--Knowledge may be power, but being educated about the 2010 changes for Roth IRA conversions isn’t spurring many to take control of their finances to create tax-free income in retirement.

“Converting to a Roth IRA is like paying off the mortgage on your house because you pay the tax bill – or the mortgage – today instead of later on down the road”

That’s one of the findings of a new survey commissioned by financial services company USAA. The survey highlights changes in investor awareness of the Roth IRA conversion provisions available this year as compared to USAA’s 2009 survey on the topic.

Specifically, the research found that of the Baby Boomers surveyed who own an IRA and can now convert to a Roth IRA due to the income limits lifting¹:

More than half (58 percent) are aware of the changes, marking a big increase over the 39 percent of respondents who were aware in 2009.

70 percent do not plan to make a conversion in 2010, and 17 percent are unsure. In 2009, 67 percent did not plan to make a conversion this year and 24 percent were unsure.

These results support the overall findings that few Boomers are planning a conversion in 2010. Seventy-two percent of all respondents who own an IRA are not planning to convert some or all of their Traditional IRA to a Roth IRA this year, and 18 percent are unsure. This closely aligns with the 2009 findings where 73 percent of all respondents who own an IRA did not plan to convert in 2010, and 19 percent were unsure.

When survey participants were asked why they wouldn’t convert, the top three choices were:

44 percent believe their income tax rates will be lower in retirement, and they do not want to pay higher taxes by converting funds now;

35 percent received a recommendation from a tax advisor or financial planner to not convert;

And 27 percent are not able to pay the taxes that would be due on the converted funds.

“It’s a positive sign that some people are consulting financial advisors to determine if a Roth IRA conversion makes sense, but we are surprised by how many investors are gambling on future income-tax rates to make this decision,” said Ken Kilday, a wealth manager with USAA Wealth Management. “The combination of today’s historically low income-tax rates and the flexibility to pay taxes on the converted funds in 2010 – or to split it between 2011 and 2012 – should encourage more investors to work with a financial expert to explore whether making a full or partial conversion this year will help them meet their long-term financial goals.”

While knowing about the elimination of income limits on Roth conversions doesn’t appear to move investors to action, the survey findings indicate that more education is still needed. When asked what would help survey respondents reconsider their decision to not convert, the top two choices were:

Having more information about the benefits of a Roth IRA (48 percent);

Having a better understanding of how the conversion process works (46 percent).

And, while having the funds to pay taxes on the converted funds doesn’t appear to be holding most people back from a conversion, more than one-third (39 percent) of respondents said that having the funds handy to pay the bill would help make the conversion decision easier.

“Converting to a Roth IRA is like paying off the mortgage on your house because you pay the tax bill – or the mortgage – today instead of later on down the road,” said Kilday. “Depending on your financial goals, paying that ‘mortgage’ now and ensuring that all future account growth will be tax free could reap big benefits for you and your heirs.”

For more information about Roth IRA conversions, visit usaa.com or call 1-800-531-USAA (8722).

Conversions from a Traditional IRA to a Roth are subject to ordinary income taxes. Please consult with a tax advisor regarding your particular situation. The preceding discussion is not tax, legal or estate planning advice. Consult with your tax, legal or estate planning professional regarding your specific situation.

About USAA

USAA provides insurance, banking, investment and retirement products and services to 7.4 million members of the U.S. military and their families. Known for its legendary commitment to its members, USAA is consistently recognized for outstanding service, employee well-being and financial strength. USAA membership is open to all who are serving or have honorably served our nation in the U.S. military – and their families. For more information about USAA, or to learn more about membership, visit USAA.com.

USAA Wealth Management is a service of USAA. USAA means United Services Automobile Association and its insurance, banking, investment and other companies. Banks Member FDIC. Investment products offered through USAA Investment Management Company, investment services and financial advice provided by USAA Financial Advisors Inc., both registered broker dealers.

About the USAA Surveys

The 2009 and 2010 surveys were commissioned by USAA to provide information on investor awareness of the Roth IRA conversion changes. The 2010 report presents the findings of four telephone surveys conducted among a national probability sample of 1,384 adults comprising 699 men and 685 women between 45-64 years of age, of which 692 own a Traditional or Roth IRA. The survey was carried out by Opinion Research Corporation using their CARAVAN® telephone sampling methodology of private households in the continental United States. Interviewing was completed during the periods of February 5-8, and February 12-15, 2010. The 2010 survey’s sampling error is plus or minus three percentage points for values at or near 50 percent, given a 95 percent confidence interval.

The 2009 report presents the findings of three telephone surveys conducted among a national probability sample of 1,259 adults comprising 615 men and 644 women between 45-64 years of age, of which 599 own a Traditional or Roth IRA. The survey also was carried out by Opinion Research Corporation using their CARAVAN® telephone sampling methodology of private households in the continental United States. Interviewing was completed during the periods of June 25-29, and July 2-3, 5, 2009. The 2009 survey’s sampling error is plus or minus three percentage points for values at or near 50 percent, given a 95 percent confidence interval.

1. Refers to Baby Boomers surveyed who have a household income of $100,000 or more.

2. Withdrawals of earnings made before age 59˝ may be subject to a 10% federal penalty and ordinary income taxes.

Roth IRA Benefits

Regular contributions may be withdrawn at any time, for any reason, without being subject to federal income taxes or penalties; converted funds may be withdrawn tax- and penalty-free after five years

Withdrawals of earnings are tax- and penalty-free if made after five years of opening the account and contributor is age 59˝ or in the case of certain other qualified withdrawals.²

Minimum distributions are not required at any age for the contributor during their lifetime.

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