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Some changes in the Roth IRA landscape have everyone clamoring about new conversion opportunities. But deciding whether to convert your traditional IRA to a Roth IRA is not only a tax decision; it’s also a financial planning decision that must be made with thorough consideration.

Beginning this year, the $100,000 income cap on eligibility to convert to a Roth IRA has been eliminated. Also, married taxpayers filing separately, who were previously restricted from converting traditional IRAs to Roths, are now able to do so.

This new opportunity was created by the Tax Increase Prevention and Reconciliation Act of 2005. The law was intended to create current revenue for the government, by collecting taxes on accounts converted now, rather than when money is withdrawn from traditional IRAs.

Anyone weighing whether to convert some or all of a traditional IRA into a Roth should ask themselves four key questions.

When you retire, will your tax rate be lower, the same or higher than it is now?

Converting to a Roth means you pay taxes on the investment now, rather than when you withdraw the money. This makes sense if you anticipate that the taxes you would pay now are less than those you would pay in the future. It depends on both future tax rates and your future tax bracket. Unless you’re confident that you’ll be in a higher income tax bracket when you withdraw the money, converting might not be the right decision.

Where will you get the money to pay the taxes?

You’ll incur a federal income-tax liability on the taxable portion of the traditional IRA in the year that it’s converted to a Roth. For conversions made in 2010, a special rule – “tax splitting” – mitigates the tax hit by allowing you to split the taxable amount between your 2011 and 2012 taxes. Regardless of whether you elect to split the taxes, if you don’t have the means to pay them from a non-retirement source, converting might not be a wise move because you’ll lose the investment benefits on the money you have to use to pay the taxes.

How long will the money remain in the account?

Generally, the older you are, the less sense it makes to convert (except in cases covered in the next question). To avoid penalties, when you begin making qualified withdrawals on your Roth account, you must be age 59½ and have had the funds in the account for five years. If you’re near retirement age and plan to begin withdrawing money from your retirement account within the next five years, conversion is probably the wrong choice.

Will you need to live on the money when you retire?

Because taxes are paid up front, Roth IRAs can be an advantageous way to pass on money to your heirs. If you don’t plan on using the money in your IRA during your retirement, converting a traditional IRA to a Roth may be a good estate planning decision.

If you’ve decided that conversion makes sense for you, you next need to determine how much to convert. Partial conversions allow you to create tax and investment diversification. They also can help you avoid jumping into a higher tax bracket when you make the conversion. And, if you don’t have cash to pay the taxes due on a full conversion, a partial conversion lowers the payment.

While online calculators are available to help you analyze Roth conversion scenarios, they often start by asking how much you want to convert. In reality, this is the last question – and it can be answered only by reviewing your individual situation.

Because these changes in the Roth landscape are new and because the income-splitting opportunity is available only for 2010 conversions, it’s a good time to consider whether a Roth conversion makes sense for you. But don’t rush to convert just because you can. Converting a traditional IRA to a Roth is not the right choice for everyone. It’s essential to take time to work through the numbers with an investment adviser.

John Wyckoff, a Certified Public Accountant, Personal Financial Specialist and Certified Financial Planner, works to develop and implement financial plans and manage investment portfolios for individuals and families in his position with StanCorp Investment Advisers. Contact him at 971-321-8090 or [email protected].