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Roth Evangelists Preach to the Unconverted

Investing: Despite the new IRA's special tax advantages, banks and brokerages say few people have transferred traditional IRAs. Experts cite confusion and a reluctance to sacrifice current benefits for future ones.


Tom Cooney of Arroyo Grande wants to convert his traditional IRA to one of the new Roth IRAs. He thinks.

Cooney, 65, has received conflicting information from his brokerage, his financial planner and his daily newspaper about whether such a conversion makes sense. "It's confusing," said Cooney.

So he has done nothing.

The complexity surrounding Roth IRAs--a new, nondeductible savings vehicle that's tax-free in retirement--is one reason cited by banks, mutual funds and brokerages to explain why they're seeing fewer conversions than they originally expected.

At discount brokerage Charles Schwab & Co., for example, fewer than 3% of 2 million existing IRA accounts have been converted to Roth IRAs, and most of those were in the first few months of 1998. At Wells Fargo & Co., fewer than 1% have been converted. Mutual fund giant Fidelity Investments reports that its conversions are closer to 10% but says investors still seem to be confused about when such a move would be advisable.

Most of the assets in IRA accounts are eligible for conversion. The Federal Reserve Board's 1995 survey of consumer finances, the most recent data available, showed that 58.9% of IRA assets are held by households with adjusted gross incomes of less than $100,000--the limit for making the conversion. Adjusted gross income is income after 401(k) and other retirement plan deductions are taken but before exemptions and itemized or standard deductions. (AGI is entered at the end of the first page of a tax return.)

Some financial institutions still expect a last-minute rush of conversions as taxpayers take advantage of a one-time tax break that allows them to spread the income--and thus the tax bill--over four years, as long as they convert by Dec. 31.

Others say confusion, ignorance of the potential benefits and reluctance to pay taxes now will keep many potential converters on the sidelines.

"People that are really interested in converting are a small slice of the overall population," said Richard D. Byrd, managing director of Wells' private client group for Southern California. "A lot of people [who might benefit] just don't want to learn about it."

Roth conversions aren't for everyone. But people who have seven years or more until retirement or who want to pass some of their IRA on to their heirs could be better off converting all or part of their nest egg. (See "Rolling, Rolling, Rolling," C15.)

Whereas withdrawals from traditional IRAs are taxable in retirement, people older than 59 1/2 can withdraw Roth money tax- and penalty-free as long as they have held the account at least five years. A Roth conversion can mean tens of thousands more dollars to spend in retirement.

The Roth investor also has the option of not withdrawing money at all. Holders of traditional IRAs are required to begin draining the account once they have reached age 70 1/2, but Roths can be passed intact to heirs (minus estate taxes that might be due).

Wells is trying to goose customers into converting by offering free seminars explaining how conversions work and who might benefit from paying taxes now to avoid paying them in the future. Mutual funds and brokerages including Vanguard Group, Fidelity, T. Rowe Price and Merrill Lynch & Co. have showered their customers with newsletters, software and interactive Web sites to educate them about Roths.

The institutions say their efforts are basically educational, since conversions don't add to their immediate profits. In the long run, however, the firms could wind up with more assets under management, especially since Roths have no minimum withdrawal requirements and the money could remain in their care for decades longer.

Financial institutions say educating investors about Roth benefits seems to work. Fidelity found in a survey of 506 IRA investors that the more people learned about Roths, the more likely they were to convert.

Recent changes by Congress also resolved some confusion and spurred conversions, said Susan Thompson, a spokeswoman for Merrill Lynch.

For example, Congress made it clear that people can undo a conversion if it turns out their adjusted gross income in 1998 is over $100,000, the limit for both singles and married people. Prior to the change, taxpayers had been warned that their IRAs could lose their tax-deferred status if a conversion was made in error.

The technical change briefly opened a loophole for taxpayers to repeatedly undo and redo their conversions to take advantage of the falling stock market in August and September, since a lower total value on their IRAs meant a lower tax bill on their conversions. The IRS stomped on that tax dodge last month, decreeing that taxpayers are now limited to redoing a conversion only once.

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