Last Updated Jan 6, 2010 10:19 AM EST
The reason these conversions have become a big deal is because the rules have changed regarding who can convert a traditional IRA into a Roth IRA. Previously, you couldn't make such a conversion if you had income in excess of $100,000. On Jan. 1, the conversion limit disappeared.
Remember, the money you put into a traditional IRA is tax deductible, but is taxed on withdrawal. For a Roth, the opposite is true -- you invest money that you've already paid taxes on, but your withdrawals are tax free.
The government certainly wouldn't let you convert money that has been deducted from taxes into an account where withdrawals are tax free without getting its share. Thus, you'll owe taxes on any amounts you decide to convert.
However, only for 2010, there is a special tax consideration. If you convert next year, you have the option to stretch your resulting tax liabilities over two years, paying half on your 2011 tax return (due April 15, 2012) and the other half on your 2012 tax return (due April 15, 2013). Any conversions occurring after 2010 will have to see the resulting tax liabilities owed in the same tax year.
Tomorrow, we'll look at how Roth IRA conversions work.
Follow the series: Roth IRA Conversions