As of 2010, there will be no income limits for converting traditional IRAs to Roth IRAs. The tax due on a 2010 conversion can be split between your 2011 and 2012 tax returns.
Before converting a traditional IRA to a Roth IRA, separate your IRA by investment class. Say you now hold $200,000 in your IRA: $100,000 in stock funds and $100,000 in bond funds.
You can transfer all the stocks to a new IRA, giving you a $100,000 stock IRA and a $100,000 bond IRA. Suppose your stock IRA drops from $100,000 to $80,000 by 2010 while your bond IRA increases from $100,000 to $110,000.
In January 2010, you can convert your stock IRA to a Roth IRA. You’ll owe relatively little tax on an $80,000 conversion.
At the same time, you can delay your bond IRA conversion throughout 2010. If the bond market drops, you can convert when the bond IRA is worth less and you’ll owe less tax on the conversion.
Similar tactics can be followed by dividing your portfolio into multiple assets classes and converting each one at its low point. If any given Roth IRA keeps dropping, you can switch back to a traditional IRA by October 15 of the following year and reclaim any income tax you’ve already paid.
