When does converting an IRA make sense?

Q: I've heard of physicians who earn more than $100,000 through their practices employing a Roth IRA conversion tax strategy to counter the expectation of rising income tax brackets in future years. Will this work for everyone, and is this a smart investment?

When a conversion is completed, it triggers an individual taxable distribution to the IRA owner. After the Roth conversion, the investments in the Roth account accumulate free of income tax and also are not subject to income tax at distribution. In essence, you pay the tax on the seed rather than on the harvest.

Traditional IRA and employer retirement accounts are infected with taxes. It is often a smart, multigenerational family legacy tax plan to use the Roth conversion strategy.

Dan Deighan, CLU, CFC, is founder and principal of Deighan Financial Advisers in Melbourne, Florida. He has counseled clients since the firm's inception in 1974. Learn more by visiting http://www.deighanfa.com. Send your money management questions to memoney@advanstar.com