Should you convert from a Traditional to Roth IRA?

There are many factors to consider when answering that question, but a couple of the restrictions that kept many individuals from making the conversion in the past have been eliminated.

Prior to 2010, converting a traditional IRA to a Roth IRA was allowed only if your gross income was less than $100,000 and your filing status was not married filing separate. That changes this year, though. The Tax Increase Prevention & Reconciliation Act of 2005 eliminated the restrictions on income and filing status beginning this year.

That same act allows a special incentive for conversions that occur during 2010--you may elect to recognize the income (and pay the related tax) in equal portions in 2011 and 2012. This delayed recognition will not only give you some extra time to pay the tax due on the conversion, but will also allow you some additional time to be certain that a conversion is right for you. This extra time for assessment is important because if you find after the fact that the conversion is not your best option (because of a drop in account value or any other reason), then you can reverse the conversion up to 6 months after the regular due date of the tax return for the year of conversion.

Please see this article from the January 2010 Journal of Accountancy for a nice rundown of the details and some advice on what factors your should consider in making your decision.