Rush to Roths as wealthier clients exploit new rules

Affluent investors stampeded to convert IRAs to Roth IRAs last year, particularly at the end of 2010.
Last year marked the first time that taxpayers earning more than $100,000 annually could convert to Roth IRAs, which allow tax-free withdrawals. Regular IRAs and 401(k) plans, on the other hand, require investors to pay taxes when the money is withdrawn.
Bank of America and The Vanguard Group Inc. reported a dramatic surge in the numbers of clients swapping their traditional individual retirement account to a Roth IRA.
Still, there’s a cost to converting to a Roth: Plan participants have to pay income tax on the amount that’s being converted.
In all of 2010, Bank of America executed more than 56,000 conversions for clients, moving about $3.8 billion in assets to Roth IRAs.
A lot of the activity took place during December, when about 14,500 accounts were converted to Roth IRAs. That accounted for about 26% of all 2010 conversions and $1.4 billion in total conversion assets.
Vanguard reported similar activity. The company performed more than 230,000 Roth conversions last year, up 530% from 2009, with most of the transactions —33%— concentrated in December.
Investors’ wait-and-see approach toward tax rates, as well as procrastination, are likely behind the pickup in year end activity.
“You have some people who put it off because they didn’t get around to it,” said Mitch Drossman, national director of wealth planning strategies at U.S. Trust. “Others wanted to see what the tax picture would look like.”
Early birds also accounted for many of the Roth conversions, albeit not as many as the last-minute converters. Vanguard said 15% of its 2010 activity take place in January, while Bank of America converted some $387 million in assets in January, second only to December.
“It makes most sense at the beginning of the year: There’s a greater window of time to see if you made the right decision,” said Mr. Drossman. “I put it as one of the items on the to-do list for the start of the year.”