With the Bush tax cuts expiring at the end of this year and unlikely to be renewed, taxpayers in the highest income brackets that are considering a Roth IRA conversion should think about doing it this year.
The highest federal tax bracket next year will go from 35% to 39.6% meaning the taxes on a $1,000,000 conversion will increase by $40,600 in 2011. If you will turn 59 and ½ next year you may want to consider waiting because the penalty for early withdrawal will expire for you next year lowering the tax on your conversion form 45% in 2010 (35% + 10% early withdrawal penalty) vs. 39.6% next year.
Young tax payers in any tax bracket with small IRA balances may also want to convert this year. That is because by converting now they will be able to shelter any future gains on their current IRA from taxes, and for a young person those gains could be substantial. For example the future gain on $10,000 for a 30year old could be $310,000 by the time the person reaches 70. In addition if your current IRA contributions were not tax deductible because your income was too high, most or all of your Roth conversion could be tax free.
One last benefit for converting in 2010 is that you are able to spread any taxes you do owe over a 3-year period vs. paying them all this year.