Data & ResearchAugust 18, 2009

Most Baby Boomers Not Planning Roth Conversion

<p>A survey commissioned by financial services company USAA found that most Baby Boomers plan to keep their traditional individual retirement accounts (IRAs) intact.</p>

Reported by Ellie Behling

The majority (73%) of surveyed Baby Boomers who own an IRA don’t plan to convert their traditional IRA to a Roth IRA in 2010, which is when the household limit of $100,000 in modified adjusted gross income is scheduled to be lifted. Any investor who converts in 2010 can pay the tax bill over a two-year period, according to USAA.

For respondents who own an IRA and have a household income of $100,000 or more, only 9% are planning to convert in 2010. More than half (57%) are not aware that income limits on Roth IRA conversions are scheduled to be eliminated next year. Two-thirds (62%) are not aware that the converted funds are subject to tax.

“There may never be a better time than in 2010 to create a tax-free income stream for retirement,” said Terri Kallsen, senior vice president, USAA Wealth Management. Kallsen said that the combination of lower account values, historically low income-tax rates, conversion income limits lifting, and the ability to pay the tax bill over two years provides a rare opportunity to increase retirement income.

Some respondents are leaning more toward Roth conversion than others. Investors with both a traditional and Roth IRA are three times more likely (15% versus 5%) to plan on converting than those who own a traditional IRA only.

Younger Boomers (ages 45 to 54) are more likely than older Boomers (aged 55 to 64) to say they plan to convert their traditional IRA to a Roth IRA next year (11% versus 5%), according to the survey. However, older Boomers are more aware of the income limit changes than younger Boomers (41% versus 26%).

USAA said most (67%) IRA owners surveyed aren’t aware that any taxes would be due on converted funds. Of the one-third (33%) who are aware taxes would be due, one in 10 (11%) didn’t realize they would have the ability to spread the tax bill over two years.

Opinion Research Corporation conducted the telephone survey in late June and July among a national sample of 1,259 adults between 45 and 64 years of age, of which 599 own a traditional or Roth IRA.