Under the Code, a taxpayer whose modified adjusted gross income for a year does not exceed $100,000 (and who, if married, files jointly) may convert an amount held in a non-Roth IRA to a Roth IRA without paying an extra penalty tax. Because traditional IRAs are established with before tax income, when converting to a Roth, the taxpayer is taxed on the value of the nonRoth IRA being converted.

Conversions take many forms, but usually are done by a rollover where either the taxpayer gets a distribution and then puts it in another account or the trustees of the two plans transfer the taxpayer's funds directly from one account to another. A third possibility is that the non-Roth IRA is redesignated as a Roth IRA.

In the case of a conversion involving property, the conversion amount generally is the fair market value of the property on the date of distribution. The final regulations address how to value distributions from a retirement annuity contract when it is being converted to a Roth. The valuation rules were changed in the final regulations to set the distribution amount as the surrendered cash value of the annuity. This change is a simplification from the valuation methods proposed in the initial regulations.

Observation: Through 2009, taxpayers must have modified adjusted gross income of less than $100,000 to rollover traditional IRAs into Roths without paying a penalty. They also must file jointly, if married, to perform this type of rollover. For tax years beginning after 2009, the income limit goes away and so does the filing status requirement. Thus, although taxpayers will be taxed on the rollover amount, they will be able to permanently avoid tax on the earnings which accumulate in the Roth IRA. Taxpayers with in a lower tax bracket from the bad economy should definitely consider a Roth conversion since their taxable income from the change will be taxed at a lower marginal rate.