There's a big tax break looming next year if you want to convert a traditional IRA into a Roth IRA. But you might not want to wait that long.

Basic rules: As with a traditional IRA, you may contribute up to $5,000 to a Roth IRA (less any traditional IRA contributions) for 2008. An extra $1,000 "catch-up contribution" is allowed if you are 50 years of age or older. There is no current income tax on any earnings within the Roth IRA. The deadline for 2008 contributions is your tax return due date (i.e., April 15, 2009).

However, you cannot take advantage of a Roth IRA if your modified adjusted gross income (AGI) exceeds a certain level. For instance, the phaseout for the 2008 tax year occurs between $159,000 and $169,000 of modified AGI for joint filers, and $101,000 and $116,000 for single filers.

Significantly, qualified distributions from Roth IRAs are exempt from income tax. A qualified distribution is a distribution from a Roth IRA in existence at least five years made

• after age 59^1/2,
• upon death or disability, or
• to pay for first-time homebuyer expenses (up to a lifetime limit of $10,000).

If distributions do not meet these requirements, the funds are treated as being withdrawn as follows: contributions first, any amount converted from a traditional IRA second and earnings third. Withdrawals made before age 59½ may also be subject to a 10% penalty.

Fortunately, you can choose to convert a traditional IRA to a Roth IRA to secure future tax-free distributions. Of course, you must pay the resulting tax on the conversion. This option is only available to individuals who have an AGI of $100,000 or less.

Key tax break: Beginning in 2010, the $100,000 AGI cap for Roth IRA conversions is removed. Furthermore, for conversions taking place in 2010, you may elect to spread the resulting tax liability ratably over the following two years.

So why would you accelerate a conversion? If you believe your IRA assets are currently valued on the low side, you might opt for a conversion if you are below the $100,000 AGI level for 2009. This reduces your tax liability on the conversion. Similarly, if you converted within the past year and the value of the assets has declined since then, you can elect to "undo" the conversion. Otherwise, you will have paid tax on the conversion when the assets were at a higher value.

The decision to convert to a Roth IRA-and when-is complex. Obtain professional assistance for your situation.