Fidelity Investments released a study that finds more than half (55 percent) of newly eligible investors who have old 401(k)s with former employers are not certain whether their assets can be converted to Roth IRAs.

The survey of investors with both retirement plan assets at former employers and annual household incomes of more than $100,000 showed that awareness of the Roth IRA conversion opportunity has increased over the past six months, but is still relatively low. Currently, 35 percent of respondents are aware of the Roth IRA conversion eligibility changes, which now allow investors at any income level to convert assets to a Roth IRA. This is up from just 12 percent in a Fidelity survey conducted in August 20093. Investors’ knowledge of whether their 401(k) assets qualify for a Roth IRA conversion also has increased. Nearly half (45 percent) now say they know whether or not such assets can be converted to an IRA versus only one third (33 percent) in 2009.

“The increase in awareness is promising, but there is still work to be done,” said Keri S. Dogan, senior vice president, Fidelity Investments. “Because a Roth IRA generally offers a number of potentially favorable benefits, such as the opportunity for tax-free growth and withdrawals, and no minimum required distributions, the conversion opportunity may be an option worth exploring for those newly eligible.”

Top Barriers Cited to Converting Assets to Roth IRA from Workplace Plans

The survey also showed that while the majority of investors with 401(k)s at previous employers are aware of basic rollover options for their old workplace plans (rolling assets to a current employer’s workplace plan, rolling to an IRA, or cashing out), a lack of understanding around Roth IRA conversion details is keeping them from rolling their workplace plan assets directly into Roth IRAs. When asked about the biggest barriers, one third (33 percent) said they do not understand the tax implications of converting to a Roth IRA and 22 percent are confused by the conversion process itself.

“Decisions around what to do with 401(k) assets left with a former employer can be complex and a bit overwhelming, but it’s important that investors consider all of their available options,” said Dogan. “Fidelity has trained representatives who can explain investors’ rollover options and the conversion process and then help them determine which option may make sense for their individual needs.”

Intention to Convert Workplace Plans Increases with Awareness, Information

Although concerns remain, the survey showed providing basic information about Roth IRAs and the new conversion eligibility rules increased investors’ interest in the account. Before being provided with any information, respondents were asked whether they had ever considered rolling 401(k) assets from a former employer to a Roth IRA. Only one-quarter (24 percent) initially said they had done so.

Survey respondents were then given a detailed description of the benefits of a Roth IRA, including: the potential for earnings to grow federally tax-free, if certain conditions are met4; the ability for contributions to be withdrawn penalty-free and tax-free at any time by the account holder or heirs; and the absence of required withdrawals at any age during the lifetime of the original owner. They also were given information about the January 2010 conversion eligibility changes. After receiving the information, nearly six in 10 (58 percent) said they would be likely to investigate converting their 401(k) with a former employer to a Roth IRA and half (50 percent) said they were considering rolling to one, but had not yet made a decision.