Are Roth IRA Conversions Overhyped?

Ric Edelman, whose radio show I happened upon yesterday, thinks so. His informative special report on Roth conversions, available online (registration required) includes a rant on the overhyping of conversions by financial advisers.

Conversion detail I hadn't thought about: According to Ric, this year's conversions will be taxed on the value of the converted IRA at year's end, not the year-end 2009 value. If investment gains increase the IRA by 10 percent this year, the tax cost of the conversion will rise accordingly.

Ric made a good point about tax projections: We can guess income tax rates for high earners will be higher in five years. But today's 50-ish IRA holder must weigh today's tax hit against taxes he or she might pay on distributions 20 and 30 years from now.

Who knows what will happen even ten years from now? Obama will be out. The Tea Party candidate may be in. What if the 2020 Congress abolishes the income tax? (You'll get used to paying VAT instead.)

My suspicion: High net worth individuals will be swayed more by psychology than intricate tax projections. We Americans don't care much for self denial or delayed gratification – look at the level of our credit card debt. Only if we're really, really rich are we likely to choose paying taxes today rather than paying taxes in the far-off future.