For tax years beginning after 2009, the $100,000 modified AGI limit on conversions of traditional IRAs to Roth IRAs is eliminated. Additionally, married taxpayers filing a separate return will be able to convert amounts in a traditional IRA into a Roth IRA. As a result, 2010 will be a pivotal one for retirement planning and poses significant tax planning challenges.

There are certain tax advantages to Roth IRAs. Qualified distributions are tax-free, they don’t enter into the calculation of tax owed on Social Security payments, and they have no effect on AGI-based deductions. These benefits flow through to beneficiaries of Roth IRAs as well.

Unless a taxpayer elects otherwise, none of the gross income from the conversion is included in income in 2010; half of the income resulting from the conversion will be includible in gross income in 2011 and the other half in 2012. A major wild card is the tax-rate picture after 2010. Absent Congressional action, after 2010, the tax brackets above the 15% bracket will revert to their pre-2001 levels. That means the top four brackets will be at least 39.6%, 36%, 31% and 28%. And, it has been rumored Congress is considering adding a new top bracket to the existing structure.

High-income taxpayers who plan to make large conversions in 2010 can elect to opt out of the deferral of tax until 2011 and 2012. In that case, these taxpayers should be considering ways to defer deductions to 2010 and accelerate income from next year into 2009 in an effort to avoid being pushed in the highest brackets by a large IRA-to-Roth-IRA conversion in 2010 . Your ELLS advisor still has time to work with you to structure your 2009 tax return to reflect this strategy.