In the year 2010, the income limits for funding a Roth will remain but the door will be opened for high income earners who previously were shut out of Roth IRA because their income came in above the $100,000 limit. They will be allowed to convert Traditional IRA holdings to Roth accounts provided they pay income taxes on the deductible contributions and any earnings in the account at the time of the conversion (penalties for early withdrawal from Traditional IRA is waived for the purposes of a conversion).

To accommodate an anticipated flood of conversions, there is a one-time opportunity in 2010 to spread the tax income from the conversion over 2 years (2011 and 2012) so that you do not have to declare the income and pay the tax bill all at once. Thus if you convert $50,000 in 2010, you will pay taxes on income of $25,000 on both your 2011 and 2012 tax returns.

SUGGESTION: If you elect to pay the resulting tax bill over a two-year period, the income tax rate is determined for that year only. Thus if your income happens to skyrocket in 2012 forcing you into a higher tax bracket, you will be paying more in taxes than if you paid earlier.

SUGGESTION: You can also convert holdings from prior employer 401(k)s and other workplace savings directly into a Roth. Just ask your financial professional for assistance.

For those older than 70 ½ years, because of the mandatory withdrawals associated with Traditional IRAs, you cannot convert those particular funds to a Roth. However, after you take your minimum distribution, you can convert the remaining IRA assets to a Roth to avoid that problem in coming years.

Head-to-head: Roth V. Traditional Ira

Now that we've examined how the Traditional IRA and the Roth IRA works, and the 2010 changes, we can now look at the two side-by-side and compare the advantages and disadvantages to figure out which is best for you.

You should know at the outset that on paper, neither retirement vehicle has an inherent financial advantage over the other. That is, if you contribute the same pre-tax amount to both over the same period, invest in the same investments, and pay taxes according to the same tax bracket, the amount available for withdrawal will be the same in the end.

But if you are able to contribute the maximum allowed to your Roth, then the tax-free gains on investment give the Roth the advantage over the Traditional. In addition, we all know that in real life tax code and your tax brackets both will change over time. The challenge, therefore, is to pay the tax bill at the most opportune moment. In general, if you anticipate your taxes will be higher in the future, you should pay the Tax Man now with the Roth. If not, you should lean toward the Traditional.

There are some nuances, however, that might change your thinking about which one is more advantageous in your unique situation:

• Unlike with a Traditional IRA account, The Roth has no mandatory withdrawals after age 70 ½ to push your income (and your tax bill) higher.
• For the most part, withdrawals are tax-free as long as you observe the 5-year-rule.
• Your heirs won't owe income tax on withdrawals. This has led some to view Roth conversions as an alternative form of life insurance.

You make the call

To convert or not convert is a risky decision because we can't know now what our tax rates will be in the future. But do not lose any sleep over this decision because it is not all-or-nothing. You can convert part of your Traditional to a Roth for diversification purposes, and you can undo your conversion if you change your mind as long as you do it in the same tax year. Your financial professional can help you make the calculations and walk you through the process.

If you are tempted to convert but don't have the funds available now to pay the associated taxes, you might want to think carefully. You should not dip into your IRA to pay the tax bill. This defeats the purpose of the conversion by chipping away value of the very nest egg you are attempting to nurture. You should only seriously consider the conversion if you can finance the resulting tax bill from a source other than your IRA.

Here are other factors to keep in mind:

• The amount of time until you will begin taking withdrawals from the IRA
• The number of years you plan to take withdrawals from the IRA
• The rate of return you expect to earn before retirement
• The rate of return you expect to earn during retirement
• Your current income tax bracket
• Your income tax bracket in retirement
• The amount of tax you will be required to pay if you make the conversion

The longer the period until withdrawal, and the higher your expected rate of return, the more advantageous it may be to convert. The greater the amount of earnings in the account, the greater the tax-free advantage upon distribution. If you are close to retirement, it may not be as beneficial to convert. Keep in mind that the larger the IRA account balance you have to convert, the more tax you will have to pay.