If you have a traditional IRA, you can convert to a Roth IRA. You’ll owe tax on the conversion but subsequent distributions will be tax-free after five years, and after you are age 59-1/2. Conversions in 2010 have unique advantages:
* You can elect to pay the tax on your 2010 tax return. Under current law, income tax rates will be higher in 2011.
* Alternatively, you can elect to pay the conversion tax on your 2011 and 2012 tax returns. The income you report from the conversion can be divided evenly between the two years. This will give you more time to raise money for paying the tax.
You can defer this decision until you’re ready to file your 2010 tax return, in 2011. However, if you are interested in a 2010 Roth IRA conversion, you should move a small amount from your traditional IRA to a Roth IRA now. There probably will be a year-end rush to implement Roth IRA conversions; having a Roth IRA already in place will make it easier for you to move money from your traditional IRA to a Roth IRA if your IRA custodian is overwhelmed by conversion requests.
