The expiration this year of an income ceiling that had made many higher-income taxpayers ineligible to convert conventional individual retirement accounts to Roth IRAs is being hyped as providing a new financial planning option, but some experts are cool to such conversions.

Contributions to conventional IRAs are made from pre-tax income, and while they grow tax free until withdrawals begin, both the principal and earnings are taxed then. The account owner must begin making withdrawals by age 70 .

Contributions to a Roth IRA are made from after-tax income, and the principal and earnings grow tax free while they remain in the account and aren't taxed when they're withdrawn. The owner of a Roth IRA faces no deadline to begin making withdrawals.

The immediate downside of a conversion is that the account holder must pay taxes on the amount of the conversion, which was deferred as income earlier.

Yet, says John Kendall, president of Kendall Financial Services Inc., of Spokane, "If you have a long time until you retire, if you have over 10 or 15 years, it makes sense to do a conversion. That's time for growth in your account to make up for the tax bill you're going to get."

Hedley Greene, a tax attorney with the Spokane office of D.A. Davidson & Co. who does a lot of estate planning, also thinks a conversion works "if we have someone who's relatively young, so that they have enough years to get back to even after paying the tax." That person probably also would not need the cash flow from required minimum distributions from a conventional IRA during retirement, Greene says.

Still, the U.S. economy's shakiness and the possibility that Congress might change IRA laws again years from now make some experts leery of advising clients to convert conventional IRAs to Roths.

"For someone in their 30s, whose desire is not to draw on their account until after they're 70 , 35 years from now, to be able to predict what the income tax is going to be then, I don't know," says Chris Hesse, director of tax at the Spokane CPA firm LeMaster Daniels PLLC. He adds that the new financial planning tool "is hyped quite a bit."

Paul Fruci Sr., president of Fruci & Associates PS, another longtime CPA firm here, also is dubious about whether taxpayers should convert conventional IRAs to Roths.

"They're asking me about it," Fruci says of his clients. "I usually say, 'I'm not doing it myself.' They're saying, 'I think you're probably right.'"

For years, the law prevented single taxpayers and married couples who had modified adjusted gross income of $100,000 or more from converting a conventional IRA into a Roth IRA. Generally, modified adjusted gross income is adjusted gross income minus deductions for passive activity losses, but including interest on U.S. savings bonds used to meet college expenses.

The Tax Increase Prevention and Reconciliation Act of 2005 lifted the $100,000 income ceiling on conversion of conventional IRAs to Roths effective this year. For 2010 conversions only, taxpayers have the option of spreading over two years the tax burden generated by a conversion. They can pay half in tax year 2011, with that payment coming due on April 15, 2012, and half in tax year 2012, due April 15, 2013.

Hesse thinks an IRA conversion might make the most sense for taxpayers who are wealthy, older, and in less than perfect health—and whose estate likely will end up being subject to the estate tax, which has lapsed for this year, but will be back in effect next year barring further congressional action.

Hesse uses the example of such a taxpayer who has a conventional IRA with a balance of $4 million and another $10 million in assets in their estate. If the taxpayer converts the IRA to a Roth in 2010, he or she would pay income tax on the amount of the conversion at a maximum rate of 35 percent, resulting in a tax bill of $1.4 million, Hesse says. Because all of the $4 million involved in the conversion would be transferred to the Roth IRA, and the tax would be paid from the rest of the estate, the full $4 million still would have a chance to grow in the Roth IRA.

That money and the earnings on it wouldn't be subject to the income tax when it's withdrawn years later by either the account holder or his or her heirs, but would be subject to the estate tax if the account holder died without having withdrawn it, Hesse says. Assuming an estate tax rate of 45 percent, if $12.6 million in assets still remained in the estate at the time the account holder died, an estate tax bill of $5.67 million would be due, he says. If the account holder, however, hadn't converted the conventional IRA to a Roth, the entire $14 million estate would be subject to the 45 percent estate tax, and the estate tax bill would be $6.3 million, or $630,000 more, Hesse says.

Whether a conversion of a conventional IRA to a Roth IRA works out well in the long run depends on several imponderable factors, Hesse says.

"You don't know what future tax rates for income will be"—including at the time when the account holder or his or her heirs withdraws the assets from the Roth IRA—so it's impossible to say how big the advantage would be of being able to withdraw those assets tax free. If the account holder's heirs ended up making the withdrawals, "you don't know what the kids' tax brackets will be" at that point, Hesse says.

How well a conversion works out in the long run also would depend on whether the investments in the converted IRA grew, he says. If they grew consistently for a long period of time, an account holder or his or her heirs could end up withdrawing a large amount of money fully sheltered from the income tax. If those assets had gone down in value, a lot of taxes would have been paid in the conversion without the taxpayer receiving the benefits he or she expected, Hesse says.

Finally, he says, nobody knows what the estate tax rate will be years from now—or even next year. For example, if Congress takes no further action, the estate tax, which expired completely in 2010, will come back into effect in 2011 at a rate of 55 percent, with the first $1 million of assets exempt from it, Hesse says.

"I just think Congress is so dysfunctional right now that it is difficult for us to provide quality advice because we just don't know what's going to happen tomorrow," he says. "It is a little bit arrogant for me to pretend I have the answers."

Fruci says he isn't excited about clients converting conventional IRAs this year.

"We don't have a very good sense of where our country is going in terms of will tax rates go up in the next few years," he says. "We don't have a very good sense of where our country is going in terms of debt load."

The federal government's big deficits could heighten pressure on Congress to raise revenue in the future, Fruci says.

"I don't really trust that they're going to let this tax-free income build up in these IRAs" for decades, he says. He notes that the government has changed direction on tax issues in the past. For example, it decided that Social Security benefits, which had been untaxable for years, would be taxed in part; that tax-free "special activity" development bonds would be taxed; and that the capital gains tax rates would go up or down at different times.

The IRA conversion option does fit for people who have so much wealth they don't need to tap into the assets in their IRAs and will pass those assets on to their children, Fruci says.

For most others, "I think it's paying a huge chunk of tax early, which probably is not very prudent," Fruci says. "There's a theory in taxes—never pay taxes early, no matter what. In a regular IRA, the tax money is in there with the regular money, and it grows and grows. That's a powerful part of what makes it work."

Greene says it's important for a financial adviser "to sit and chat with a client, ask 'What are your goals?, and listen to them." Otherwise, he says, a financial strategy can become "a straitjacket," and "we're letting the tax tail wag the dog."

Advisers, he says, need to ask, "'Is your goal to leave as much as you can to your kids?' Does the client say, 'I'm going to die at the exact moment when I spend my last nickel.' Are they more interested in making gifts with a warm hand—that is, while they're still living?

"I tend not to rush to the conversion side of things," Greene says. "The government has been known to renege on these things."

That said, he describes the Roth IRA as "a marvelous, marvelous tool. There is a huge power to these funds sitting in these accounts and continuing to generate earnings. That's where the huge tax advantage is that we're passing on to the next generation, but I'm not sure it provides as great a benefit as we initially might think. Somewhere in the estate, there has to be a payment" of the estate tax, Greene notes.

There are yet more points to consider. Fruci says that even if you're past retirement age and convert a traditional IRA to a Roth IRA, you must wait five years before making withdrawals if you want to enjoy the advantages of withdrawing money tax free. Kendall points out that while the income ceiling on Roth IRA conversions was lifted this year, the income ceiling on Roth IRA contributions for 2009 was modified—but left intact. Single taxpayers who have modified adjusted gross income of $120,000 or more, and married taxpayers who have modified adjusted gross income of $176,000 or more, can't make such contributions, which he says is something to keep in mind amid all the hype this year about conversions.