It's Time to Rock Your Roth

"This is a very good time to convert," says Jean Dorrell, a financial adviser with Senior Financial Security in Summerfield, Florida. "The market is dropping; you're probably under water in some of your investments, and you can take advantage of that by converting."

To keep their tax rate low, Dorrell tells clients to convert just a portion of their IRA money every year, instead of converting large amounts all at once. That should keep the conversion tax burden manageable.

Create a 2010 do-over. If you converted last year, you may find that the amount now in your Roth is less than what you put there. So you're paying taxes on "income" that has disappeared. You have until October 17 (the final due date for extended 2010 income tax returns) to "recharacterize" that conversion, effectively canceling it and the resulting tax bill.

If you've already filed your 2010 tax return, you'll have to file an amended return. Definitely worth doing, says Ed Slott, an IRA expert and publisher of Ed Slott's IRA Advisor newsletter.

He even suggests that people who converted last year and saw their Roth account remain relatively stable may want to recharacterize, to defer the tax day of reckoning.

You're not allowed to convert the same money twice in the same year, but if you're reversing a conversion from last year, you only have to wait 30 days to reconvert it. So if your Roth is beaten down, you can reverse it now, and then convert back to a Roth later this year. That could buy you time to pay the taxes and, more importantly, a lower tax bill. Put another way, if you converted $50,000 last year, and it's only worth $40,000 now, you can unconvert, wait 30 days, and then reconvert $40,000 now. It will save you from having to pay income taxes on the $10,000 that was lost.