Between now and the end of the year, we will introduce several tax planning considerations for this year and next. We begin this series with a look at Roth IRA conversions, which are available to a greater number of taxpayers in 2010. Not only are more taxpayers eligible for Roth IRA conversions, but 2010 conversions are eligible for a deferral of the resulting income tax liability.

As you probably know, Roth IRAs carry different tax attributes than traditional IRAs. While traditional IRAs provide their tax benefits up front in the form of tax-deductible contributions, Roth IRAs are tax-favored at distribution time. That is, distributions from Roth IRAs are generally tax free. Because of the nontaxable nature of these distributions, Roth IRAs are also free from the required minimum distribution rules that apply to traditional IRAs and other retirement accounts.

Currently, Roth IRA conversions are disallowed for taxpayers with income exceeding $100,000, but this income ceiling will be suspended for 2010. Additionally, taxpayers may elect to report the income from 2010 Roth IRA conversions in equal installments on their 2011 and 2012 income tax returns.

As tax planners, we are quick to recommend income deferral and deductions acceleration, but that is not automatically the best course of action for 2010. In order to determine whether or not to defer income from Roth IRA conversions (or any other discretionary income), taxpayers need to take into account that the top two income tax brackets are lower in 2010 than they will be in 2011 and 2012. Furthermore, those top brackets will likely apply to income at considerably lower levels after 2010. While income deferral still might be the right choice, the impact of rising tax rates beyond 2010 should not be ignored.