Advisers leaving clients in the dark about Roth conversions, poll shows

The majority of investors who work with advisers are not aware that income limits associated with the conversion of a traditional IRA to a Roth IRA will be lifted in January, according to a survey conducted by Fidelity Investments. The survey — of 800 retirement plan owners with household income of $100,000 or more — found that 39% of the participants work with financial advisers. Of those, a whopping 83% responded that they had no clue that the income limits on traditional-to-Roth IRA conversions will be lifted Jan. 1. Until the rule change, investors whose gross adjusted income exceeds $100,000 a year are unable to do the conversion. While most — 60% — of the investors who work with advisers said they are confident that they understand the benefits of a Roth IRA, the survey revealed gaps in knowledge. For example, 25% of the “confident” investors incorrectly believed that the contributions to a Roth IRA are tax-deductible, while an additional 6% of those polled didn't know the answer, Fidelity found. Converting to a Roth IRA from a traditional IRA currently is a taxable event. But the Internal Revenue Service is giving investors the opportunity in 2010 to pay the tax over the following two years. Contributions to the Roth are not tax-deductible, but the investment earns interest tax-free, and the investor receives tax-free withdrawals in retirement. In contrast, an IRA allows investors to make tax-deferred contributions, but the withdrawals in retirement are taxed. The surveyed group, which also included individual investors who do not work with advisers, also reported that they were unaware of the conversion opportunity. Of the 800 participants, 88% said they were unaware of the conversion opportunity, and 34% said they did not understand the tax implications of the Roth. Fidelity conducted this survey online Aug. 14-28.