Fidelity Investments® Survey Finds Low Awareness of Roth IRA Recharacterization Option as October Deadline Nears

BOSTON--(BUSINESS WIRE)--With the October 15 deadline for recharacterizing a Roth IRA conversion just weeks away, a Fidelity Investments^® study¹ released today finds that less than a third (30 percent) of investors who are newly eligible to complete a Roth IRA conversion are aware of the flexibility they have to “undo” the move. The findings of this survey coincide with the publication of a new Fidelity^® Viewpoints article, which discusses potential reasons for considering a recharacterization.

“We encourage investors to do their homework, work with their tax professionals, and fully understand how a Roth IRA might fit into their long-term retirement plans and potentially help minimize taxes and maximize retirement savings.”

The process, known as “recharacterization,” allows an investor to reverse amounts converted from a Traditional IRA to a Roth IRA and recover any taxes paid. When these investors were asked what circumstances would spur them to recharacterize their Roth IRA, the top reason (54 percent) cited was an unexpected drop in their taxable income in retirement. Forty-four percent of investors said that they would recharacterize if the additional taxable income from a Roth IRA conversion puts them into a higher federal income tax bracket. Other reasons included not having sufficient cash reserves to cover the tax bill (35 percent) and a significant drop in the value of investments after converting to a Roth IRA (32 percent).

“Deciding whether to convert to a Roth IRA or not, as well as the resulting tax implications from the conversion, can be confusing for many investors, “said Chris McDermott, senior vice president, investor education, retirement and financial planning, Fidelity Investments. “Knowing that they have the ability to reverse the Roth IRA conversion in the event their financial situation changes can help them be more confident in making a decision.”

The new Viewpoints article (www.fidelity.com/rothconversion) outlines several reasons for considering a recharacterization, including:

An increase in an investor’s taxable income that results in a shift to a higher federal income tax bracket.
A drop in anticipated taxable income in retirement, which could reduce the benefits of a Roth IRA’s tax-free distributions.
A decline in the value of the investments in the converted Roth IRA.
The inability to pay the taxes that resulted from the Roth IRA conversion.

To further help investors understand the recharacterization process, a hypothetical example is outlined within the Viewpoints article that illustrates a Roth IRA conversion, recharacterization and another subsequent conversion. The example outlines the potential tax savings a hypothetical investor may encounter if certain conditions are met.

The article also highlights several rules that investors, or their financial or tax advisors, should be aware of when contemplating a Roth IRA conversion. These include that the deadline for completing a recharacterization (usually on or about October 15), all or a portion of the amount you converted can be recharacterized, and traditional IRA balances can be reconverted back to a Roth IRA in the next tax year or 30 days after the recharacterization, whichever is later.

“The removal of income restrictions on Roth IRA conversions this year opened the door for many investors to have access to this type of account for the first time,” said McDermott. “We encourage investors to do their homework, work with their tax professionals, and fully understand how a Roth IRA might fit into their long-term retirement plans and potentially help minimize taxes and maximize retirement savings.”

Fidelity Offers Wide Range of Roth IRA Conversion Guidance

To handle the new demand for education regarding Roth IRA conversions and recharacterizations, Fidelity’s representatives have been trained to help provide guidance to investors. The firm also offers a wide range of guidance surrounding Roth IRAs, from learning the basic account features using the IRA Evaluator (www.fidelity.com/tvr) to helping determine whether or not a full or partial Roth IRA conversion may make sense for an investor with the Roth Conversion Evaluator (www.fidelity.com/rothevaluator).

Investors also have the option of processing a Roth IRA conversion over the phone or using new online functionality on Fidelity.com that enables investors to complete a full or partial Roth IRA conversion.

Fidelity is committed to providing investors with information they need to make an informed decision around the Roth IRA conversion opportunity, including ongoing Viewpoints articles and online content (www.fidelity.com/rothconversion) that provide guidance on the topic. As well, Fidelity representatives are ready to help investors with the decision-making process both on the phone at 1-800-FIDELITY or in person at any of the company’s 140 investor centers across the United States. Nevertheless, it's critically important for investors to analyze their situation carefully and work with a tax advisor to decide if a Roth IRA conversion makes sense.

About Fidelity Investments

Fidelity Investments is one of the world's largest providers of financial services, with assets under administration of $3.3 trillion, including managed assets of nearly $1.5 trillion, as of July 31, 2010. Founded in 1946, the firm is a leading provider of investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing and many other financial products and services to more than 20 million individuals and institutions, as well as through 5,000 financial intermediary firms. For more information about Fidelity Investments, visit www.fidelity.com.

Guidance provided by Fidelity is educational in nature, is not individualized, and is not intended to serve as the primary or sole basis of your investment or tax-planning decisions. Fidelity does not provide legal or tax advice. Fidelity cannot guarantee that such information is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use. Fidelity disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Always consult an attorney or tax professional regarding your specific legal or tax situation.

Fidelity Investments, Fidelity and Fidelity Investments and the Pyramid Design logo are registered service marks of FMR LLC.

Fidelity Brokerage Services LLC, Member NYSE, SIPC

900 Salem Street, Smithfield, RI 02917

560052.1.0

¹ Data was collected via a telephone survey among a national probability sample of 1,008 adults comprising 503 men and 505 women 18 years of age and older, living in private households in the continental United States. Interviewing was conducted from July 9-12, 2010, by Infogroup/ORC. The results of this survey may not be representative of all adults meeting the same criteria as those surveyed for this study.