This year rings in a new era for Roth IRAs. In 2010, anyone with an eligible rollover distribution from a company plan or IRA can convert that distribution to a Roth IRA, regardless of income or tax filing status. The $100,000 income ceiling for Roth IRA conversions is permanently repealed, so high-income clients can now convert their IRAs. Married individuals filing separately can also now convert.

It's true that contributions to Roth IRAs still face income caps. But high-income clients can make nondeductible contributions to traditional IRAs, which can be immediately converted to Roths (the pro rata rule will apply).

WHO CAN CONVERT?

Traditional IRA owners (individuals with SEP IRAs and SIMPLE IRAs) can do Roth conversions. Just watch for the early distribution penalty from a SIMPLE IRA, in the first two years. Plan participants in 401(k)s, 403(b)s and 457 plans can also do Roth conversions as long as they're eligible to take a distribution from the plan, and the funds are eligible for rollover to an IRA. See if a plan allows in-service distributions, so funds can be converted now instead of after a client stops working.

Spouses who inherit IRAs can roll the accounts to their own IRAs and then convert to a Roth. So can spouses who inherit an employer-sponsored plan such as a 401(k). Non-spouse IRA beneficiaries can't convert inherited IRAs to a Roth, but a non-spouse beneficiary of a company plan can convert those plan funds directly to an inherited Roth.

Starting this year, companies must allow this transfer of inherited plan funds to a properly titled, inherited Roth IRA, which means the name of the deceased plan participant must appear in the account title and it must indicate that it's a beneficiary IRA. Of course, if beneficiaries convert, they will owe tax on the conversion just like an IRA owner would.

WHO SHOULD CONVERT?

You should evaluate a 2010 Roth conversion for every client. These points should help you decide:

How long do clients intend to keep funds in a Roth once they convert? Roths are meant for the long term. If clients will need to use any of those funds within 10 years, converting isn't worth it. The power of the Roth is its ability to grow funds tax-free. The longer the funds remain untouched, the more advantageous the conversion is.

Will clients need the funds in retirement? Roth IRAs have no required minimum distributions (RMDs). Thus clients who won't need their IRAs for living expenses in retirement can leave these accounts untouched and pass them on tax-free to beneficiaries as part of their estate. No lifetime RMDs make the Roth ideal for estate planning. Non-spouse Roth IRA beneficiaries must take RMDs when they inherit, but these can be spread over their lifetimes and will generally be tax-free.

The Roth IRA is included in the owner's estate and is subject to estate tax. But if your clients don't convert, the balance in traditional IRAs is still subject to estate and income tax when beneficiaries withdraw it. Also, clients who don't want to pay taxes upfront for a Roth conversion must make RMDs, withdrawing from their IRAs and paying tax on those distributions once they turn 701/2.

Will future tax rates go up? If tax rates will be increasing, it pays to convert now at lower rates. Moreover, some account values are still depressed, adding to the tax savings on a Roth conversion. If your clients believe they'll be in a lower tax bracket in retirement, they might want to stay put and not convert.

Can your client pay the tax? Even if conversion makes sense, clients still must have the money to pay the income tax. Ask where that money will come from. It's best to use other (non-IRA) funds to pay that tax. Paying the tax from the IRA funds will diminish the value of the Roth, since not all the funds withdrawn are going into the Roth. Never pay the tax from the IRA funds if the client is under 591/2, since that triggers the 10% early withdrawal penalty, making the cost of the Roth conversion prohibitive.

OTHER OPTIONS

If you're still not sure, consider a partial conversion from an IRA to a Roth.

Remind clients that they can also undo the Roth conversion in a "recharacterization," which is a reversal of all or part of the conversion. Your clients have until Oct. 15, 2011, to undo a 2010 Roth conversion. Even if clients pay the income tax when they file their 2010 tax return on April 15, 2011, clients can later decide to undo the conversion, file an amended return and get a refund. If investments tank from the time of the conversion to the deadline for recharacterizing, clients won't have to pay tax on value that no longer exists.