Ready ... set ... convert to a Roth

(Money Magazine) -- You've probably heard that the restriction barring those earning more than $100,000 from converting a traditional IRA to a Roth will soon be history. This means that as of January, anyone with an IRA can create tax-free income in retirement.

This opportunity is no freebie -- you will have to pay income tax on the taxable portion of what you transfer. But the case for converting is compelling enough that it probably makes sense to foot the bill and move a portion of your stash.

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Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005)

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Generally speaking, a Roth conversion makes the most sense if you think you'll face the same or higher tax rates in retirement. This is hardly a wild assumption, with the Bush tax cuts set to expire in 2011 and projected deficits that make future tax hikes an increasing possibility.

But a fortysomething who converts today and pays taxes upfront could eventually come out ahead even if he fell into a lower bracket at retirement.

Now, it might not appear that way at first. For example, a 45-year-old in the 28% bracket who converts but then falls into the 15% bracket might look to be slightly behind at 65. But as he gradually taps the account throughout retirement, the tax-free growth of a Roth can more than make up for the taxes paid.

Since time is a big factor, a conversion might not make sense if you're over 60 and think you'll be in a lower bracket in retirement.

Then again, who knows what your tax rate in retirement will be? So why not hedge your bets by spreading your nest egg across accounts that receive different tax treatment?

Roths offer several other worthwhile advantages. For example, you have the option of leaving a larger legacy to your heirs through a Roth IRA, which they can cash in immediately or draw on for the rest of their lives -- tax-free.

Also, with a Roth you aren't required to start pulling money out after age 70½. And unlike regular IRA withdrawals, money taken from a Roth IRA won't count in determining whether any of your Social Security benefits will be taxable.

There are a few caveats, however.

Since the amount you transfer to a Roth will boost your taxable income, the conversion could push you into a higher bracket. To avoid the heftier tax bill, convert smaller amounts over several years. Or wait until you're in a lower bracket.

Whatever the tax tab, don't tap the account you're converting to pay the taxes. If you have to do that, you'll have fewer dollars growing tax-free in the Roth, which will erode the long-term benefit of the swap.

Finally, you can undo a conversion as long as you act before the income tax filing deadline, including extensions, for the tax year of the conversion. Think of it as an escape hatch in case you have second thoughts.