Relatively low stock prices make this an ideal time to convert a traditional IRA to a Roth IRA. The lower the value of your IRA, the lower the income tax payable on the conversion. After five years (as long as you’re beyond age 59-1/2), all Roth IRA withdrawals will be tax-free.
If the assets in your IRA appreciate, you can keep those assets in a Roth IRA. If those assets decline in value, however, you can achieve tax savings by re-characterizing the IRA (changing it back to a traditional IRA). This re-characterization will wipe out the tax payable on the original conversion. For 2001 conversions the deadline for re-characterizing is October 15, 2002, over a year from now. Thus, this strategy provides a “free look” at a possible Roth IRA conversion.
To qualify for a Roth IRA conversion, your taxable income (single or joint return) must be no more than $100,000 for the year.