Saturday, December 26, 1998

Investors finally see the (Roth conversion) light

By VIVIAN MARINO

AP Business Writer

NEW YORK (AP) -- Investors are flooding banks, brokerages and other financial firms with last-minute requests to convert their traditional Individual Retirement Accounts into new Roth IRAs by year's end.

The sudden spurt of interest has forced some companies, including Fidelity Investments, the Vanguard Group and Schwab, to institute their own cutoff period for conversion applications.

Many more have been beefing up their staff -- much like retailers who have added Christmas help -- to handle the extra paperwork.

Transactions must take place by Dec. 31 for investors to take advantage of a one-time tax break that allows the income tax owed on the conversion to be spread out over four years. To qualify for the exchange, annual income for individuals and married couples cannot exceed $100,000.

"I'm telling people to go ahead and do it," Ed Slott, a New York accountant who publishes a monthly IRA newsletter said Wednesday.

Slott said he has received hundreds of inquires over the past several days alone from investors seeking information about conversions.

"Now all of a sudden everyone wants to convert -- all at once," he said.

Financial companies say customers had delayed making a decision early on because they were confused about the tax law and reluctant to pay an upfront conversion tax. Conversion volume was so slow, in fact, that some companies, including Wells Fargo Bank in San Francisco, launched public awareness campaigns.

At Charles Schwab Corp., 10 percent of the eligible IRA holders, or 150,000 accounts representing $3 billion, had converted by Dec. 23. The discount broker manages 1.9 billion IRA accounts totaling $108 billion in assets.

"That's fairly high," Carolyn Spitz, a vice president for retirement products, said of the conversion rate.

She said the highest volume came on Dec. 15, the deadline the company had set for guaranteeing that the conversion transaction would be finalized by year's end. Although it continues to take applications without a firm guarantee, Schwab remains confident all transactions would be completed in time, Spitz said.

"We're bringing in extra people for this activity. We've increased our staff by about 30 percent," she said.

Although it's not tax deductible, the Roth IRA's key benefit is that earnings grow tax-free and future distributions aren't taxed provided certain conditions are met.

Traditional IRAs are tax-deferred. They may be deductible for some individuals, including those who aren't covered by an employer-sponsored retirement plan, or for those who meet certain income requirements.

Investors and savers can open new Roth IRAs after Dec. 31 -- they have until April 15 to open accounts for the 1998 tax year. The same deadline applies to traditional IRAs.

Regardless of the conversion tax, Slott said, most individuals still would come out ahead, especially those who don't expect to tap into their IRAs until 10 or more years -- enough time for the growing assets to offset the tax.

Having the tax spread out over four years would certainly ease the bite. But Slott also noted that investors were given the option this year to reconvert, or switch back to a traditional IRA after a conversion.

Some investors reconverted after discovering they didn't meet income requirements or after seeing the value of their accounts diminish from the stock market correction.

"It's like betting on a horse after the race is over. The government is giving you such a break," Slott said.