Editor's Note: Rick Rodgers is a retirement specialist and the author of The New Three-legged Stool. He has been kind enough to post a few thoughts about Roth IRAs, which are timely given provisions in the tax code for 2010. Rick's post is technical. But if you're in a career transition and your income is way down this year, I encourage you to take a look, ask questions and get tax advice. You could save some money.

Everyone is now free to convert to convert an IRA to Roth. The $100,000 cap on adjusted gross income (AGI) has been lifted in 2010. The income ceiling for Roth contributions, however, remains in place.

A little background: Conversions are different than contributions. Conversions move money from a traditional IRA to a Roth IRA. Contributions take part of your earned income and put it into a Roth IRA. The income restrictions have been lifted on conversions but not on contributions.

Contributions begin phasing out for joint filers when their AGI reaches $167,000 and are eliminated at $177,000. For single filers the phase out begins at $105,000 and ends at $120,000.

If your AGI is above these levels you can still make a contribution to a Roth by first making a non-deductible contribution to a traditional IRA and then immediately converting it to a Roth. There are no income limitations to making non-deductible IRA contributions. However, there may be tax implications to doing this if you have other IRA accounts. 

Converting an IRA to a Roth generally makes sense if you expect to be in the same or a higher tax bracket in retirement. You should also be able to afford to pay the tax on the conversion from other sources so the entire amount of the conversion remains in the Roth.

A significant advantage to converting this year is the ability to defer taxes on your conversion. Taxpayers that make Roth conversions in 2010 can elect to defer 50% of the income to 2011 and 50% to 2012. The question is – should you convert and if so how much of your IRA should be converted?

WHEN IN DOUBT – CONVERT! AND DO IT NOW

Many people have asked me how I can be so sure that converting to a Roth is the right thing when tax law is so uncertain. We know that the Bush tax cuts are expiring at the end of 2010 but many people believe they will be extended for some taxpayers. The uncertainty of the health care legislation and how it will be paid for could be another tax trap for upper income people. Wouldn’t it be better to wait until the tax law changes have been passed?

You don’t need to wait because you can always undo your Roth conversion until your filing deadline. That deadline is April 15, 2011 and could be as late as October 15, 2011 if you file for extension. Up until the deadline you could undo all or part of your conversion and it would be like you never converted in the first place.

My advice is to convert the maximum amount you can afford to pay for with funds outside of the IRA. Let the financial markets work for you from now until April 2011. Rising financial markets and favorable tax laws may signal that you want to keep everything in the Roth and pay the tax.

If not, undo some or the conversion until the tax bill is where you want it to be. Next April will be too late to make a conversion for 2010. It is always better to convert too much and then undo part of it later than to convert too little and not be able to do anything about it after the year has ended.

There is no better time to do tax planning if you want to make sure you are in a lower tax bracket when you retire. The last few months of 2010 may very well be the lowest income tax rates we see for some time, especially for higher income taxpayers. Act now while tax rates are still low.

About the author

Rick Rodgers wrote one article on this blog.

Rick Rodgers, CFP®, is President of Rodgers & Associates in Lancaster, PA and author of “The New Three-Legged Stool™ A Tax Efficient Approach To Retirement”.

• Blog