Roth IRA Conversion Levels Continue to Show Muscle in 2012

In Fidelity Investments’ five-year analysis of IRA contributions double-digit percent contribution increases were seen across all age groups – from investors in their 20s to 70 and older.

Roth IRA conversion activity in 2012 continues to be double the level seen in 2009 – before income limits were removed.

Fidelity’s analysis highlights positive contribution trends across all age groups. The average Roth IRA contribution for the 2011 tax year was $3,210 for those age 20 to 29, a 12.9% increase from 2007. For those 60 to 69, the average contribution was $4,690, a 13.4% increase from 2007.

“The historic market conditions over the last several years have jump-started many investors to take control of their personal economy and increasingly focus on saving for their retirement,” said Ken Hevert, vice president, Fidelity Investments. “These strong contribution rate increases also show more investors are leveraging the power of tax-advantaged vehicles like IRAs to achieve their retirement goals.”

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With income limits removed for Roth IRA conversions in 2010, investors are still continuing to examine the Roth IRA as a potential strategy within their overall retirement savings plan.

For the first half of 2012, Fidelity conducted more than 45,000 Roth IRA conversions, a slight increase over the number of conversions conducted during the same time last year, and more than double (109%) the number conducted within the same time frame in 2009 – before income limits were removed.

Usage trends of Roth and traditional IRAs were also examined, highlighting the various benefits of each account. Findings include:

• Tax-free growth potential and withdrawals have made Roth IRAs a consistent favorite. On average, contributions to Roth IRAs have surpassed those made to traditional IRAs by 62.7% since tax year 2007.
• For the past five years, investors in their 60s have had the highest Roth and traditional IRA contribution rates. For tax year 2011, these investors contributed on average $4,930 to Roth IRAs and $4,790 to traditional IRAs.
• As many investors in their 50s cannot contribute to a Roth IRA because of income restrictions, they have the highest propensity toward using IRAs. For the past three tax years, on average 41.6% of their contributions are made to traditional IRAs.
• Tax benefits add to the popularity of Roth IRAs, with 84% of all contributions made by investors in their 20s.