New York, NY -- (SBWire) -- 11/04/2010 -- Time is running out on a one-time tax deal for investors who want to transfer, or "convert," money from a taxable individual retirement account to a Roth IRA.

Thanks to a law that took effect Jan. 1, all taxpayers are now permitted to convert a regular IRA to a Roth. Before then, conversions weren't allowed for those earning more than $100,000. (Roth IRA contributions, in contrast, remain off-limits for individuals with modified adjusted gross income of $120,000 or more and married couples with income of $176,000 or more.)

That means anyone willing to pay the income taxes due upon converting can move retirement savings into a Roth, where the money can grow tax-free.

To make that more palatable, Uncle Sam is offering a special deal that expires on Dec. 31. Those who convert in 2010 can choose to report the income on their 2010 tax returns or they can spread the income equally across their 2011 and 2012 returns.

Those who worry about tax rates going up soon may want to elect to pay the tax bill in their 2010 returns. But because the amount converted inflates taxable income, dividing the taxable income may help avoid a higher tax bracket.

It may also keep income below the threshold of paying a higher Medicare Part B premium or owe taxes on Social Security income. Likewise, those who expect their taxable income to be lower in 2011 and 2012 may benefit by paying the tax hit later, says Robert Keebler, a certified public accountant in Green Bay, Wis.

Why bother converting to a Roth?

Roths shield those facing higher future tax rates from tax bills in retirement. They also give those who don't need the money a way to pass more to heirs.

With traditional IRAs, distributions are generally taxable and, after age 70 1/2, mandatory. In contrast, withdrawals from Roths are voluntary and generally tax-free. While those who inherit either type of IRA must take annual withdrawals, Roth beneficiaries don't owe income tax on the money.

Those over 70 1/2 must take a traditional IRA distribution before converting. Otherwise, they'll face a 6% excise tax on the entire amount they should have withdrawn.

To prevent unintended taxable distributions, move the money via a direct "trustee-to-trustee" transfer. That's when the money moves directly to the new IRA without the account owner taking possession of the funds. If the money goes to a person, there are 60 days from the date one receives the funds to get it into a Roth without triggering income taxes and, possibly, penalties.

Fill out a new beneficiary designation form for a Roth or it may have to be liquidated within five years of death.

If after converting the Roth loses value, "recharacterize" it by transferring the money back into a regular IRA by Oct. 15 of the year following the conversion year. That wipes out the income-tax liability. For more information visit http://www.theretirementgroup.com