The Roth Wave

Tax advisors believe a Roth IRA conversion would benefit 43% of their clients this year, a big increase from 13% last year, according to a new study by Fidelity Investments. More than a third of clients eligible to take advantage of the recent removal of income limits on Roth IRA conversions are expected to complete a conversion in 2010, and 88% of advisors expect discussions with their clients about Roth IRA conversions will increase during the next six months, the survey of some 500 tax advisors found. Of conversions already started or completed, 44% are for $50,000 or more. Two-thirds of advisors in the survey indicated they think income taxes will generally rise in the future.

Advisors reported that although the vast majority of their clients are interested in converting to a Roth IRA, they also are concerned about potential tax costs. Fidelity said in a statement that it believes investors should generally avoid using proceeds from a Roth IRA conversion to pay the tax costs because that reduces the amount that can potentially grow federally tax free and could offset any tax savings gained by converting. But according to the survey, half of tax advisor clients plan to pay for a conversion from the account being converted.