Converting a traditional IRA to a ROTH IRA and paying taxes on the converted amount today may save you significant taxes down the road.  Up until 2010, the ability to convert has been limited to those with no more than $100,000 in annual income.  But in 2010, all IRA holders will be able to not only convert regardless of income, but also elect to spread the tax payments due over two years, 2011 and 2012, easing the cash flow restraints that may have kept some from converting up until now.

The appeal of a ROTH conversion may be even greater among owners of small business start ups.  When I started Broadleaf, I incurred start up losses that I was able to fully offset with income from converting a portion of my IRA rollover.  As my income has slowly grown, I have converted additional amounts to make sure I make full use of my annual income deductions like mortgage interest etc.  In essence, I have been able to convert over $200,000 in IRA assets to a Roth tax free over the last four years, a rare opportunity indeed.  As my income grows, I have converted less but now with the income limit going away, I will still be able to do more if I believe it would benefit me economically. 

Given the direction of the economy, the fact that many might have lost their jobs and have lower incomes this year, it likely makes a great deal of sense for almost anyone to touch base with their accountant and see if a ROTH conversion could work to their benefit.  And again, the good news for 2010 is that any tax bill doesn’t have to be paid all at once as has been the case up until now. 

For those that converted IRA assets earlier this year, the conversion may have worked out even better as the values of those converted assets has likely appreciated following this year’s stock market gains.  You can also always re characterize a converted ROTH back to an IRA if, for instance, the value of the assets converted has plunged making the timing of a conversion today financially more appealing.  While I doubt we’ll double dip with the economy, if we do, a re characterization might be something to consider. 

And again, for those who may have started a business following the worst recession since the Great Depression, the prospect of a tax free ROTH conversion might be just the silver lining you’re looking for as you are faced, no doubt, with the inevitable year or two of small business losses.   (According to Fortune Small Business, the average small business wage was lesss than $30,000, the lowest since 2006.  So really, a ROTH conversion could be unique to you.)

For more thoughts on conversion, check out the following link.  

Disclaimer: I am not accountant.  Anyone interested in converting an IRA to a ROTH IRA should consult their accountant before doing so.