Here's what you need to know.

(1) As of the first of the year, Roth IRA conversion became available to more tax payers. Prior to January 1, single and married couples with modified adjusted gross incomes of $100,000 or more were not eligible to convert holdings in a traditional IRA to a Roth IRA. Married couples who filed separately were also ineligible, regardless of their income.

The income eligibility limit has been removed and as of 2010, all IRA owners, including those with high incomes, are eligible to convert their traditional IRA to a Roth.

(2) Assets in a traditional IRA are fully taxed when you tap into them upon retirement. Roth withdrawals, given certain requirements (see #4) are tax free.

(3) You must pay income taxes (at your current rate) on the amount you convert.

(4) Your Roth must have been in existence at least five years before you can make penalty free withdrawals. After the five year requirement, all withdrawals are tax free and, if you are 59 ½ years old, penalty free.

(5) If you convert from a traditional IRA to a Roth during 2010 you can spread the amount of taxes you owe over a two year period.  In other words, you can report half of the conversion on your 2011 tax return and the second half on your 2012 return.

The option to spread the taxes due over two years is available only if you convert during 2010.

Note: The top marginal tax rate increases from 35% in 2010 to 39.6% for 2011 and 2012.

Bottom line: A Roth conversion is not for everyone. You should discuss your tax situation with an advisor. In general, it makes sense provided you can pay the taxes due from your income (or other assets) and not from money taken out of your IRA. Why? Because you'll be hit with interest payments and penalties on funds removed from your IRA account to meet the conversion tax bill. And, of course, this in turn reduces the amount you'll have in your retirement nest egg. 

Before calling your accountant or financial guru, run your numbers through one or more of the five calculators at: http://www.dinkytown.com/ .

They are:

1. Should I convert to a Roth?
2. Should someone who is early in their career convert?
3. Should a Baby Boomer convert?
4. Should someone who is retired convert?
5. Should I convert a large traditional IRA to a Roth?

You will need your estimated adjusted gross income (AGI) in order to use the calculators - the figure on line 37 of your 2009 tax return. It is your total income minus any adjustments. Adjustments include IRA deductions, HAS deductions, self-employment tax deductions and alimony paid. This total is before standard deductions, itemized deductions or income tax credits are taken.

TIP: If you are unfamiliar with any of the terms or information requested to complete the calculator forms, click on "definitions" for easy-to-understand explanations.