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In the coming months, you'll be hearing a lot about Roth IRA conversions, due to the elimination of the $100,000 income limit, effective January 1, 2010. Beginning January 1, 2010, taxpayers at all income levels will be able to convert, and the resulting income tax liability is payable over two years, 2011 and 2012. The answer to this question is both mathematical and political.
While there are several reasons why a Roth IRA conversion could be favorable, the key to success in a Roth conversion is in either or both of two factors: (1) the individual expects future tax rates to be higher and/or (2) the individual has a time horizon of expected income tax-free growth that is sufficient to offset the disadvantage of the immediate tax liability.
There are no hard and fast rules that make this analysis easy. For some, unused tax attributes, such as charitable carry forwards, the Roth IRA conversion can "free up" the unrealized tax benefit, and paying little to no income tax on the conversion. Each case must be analyzed on its own, taking into account the overall effect on net-worth and wealth ultimately passed to heirs.
Our advice to anyone even thinking about converting is to convert the IRA on January 4, 2010, and segregate by asset class into several Roth IRAs. You will have until October 15, 2011, to decide whether to pay the tax or re-characterize the Roth IRA back to a traditional IRA and eliminate income tax. By segregating into several Roth IRAs, you may re-characterize those which have decreased in value, while allowing the other Roth IRAs to remain unchanged.