For years, savvy business owners have supplemented company-sponsored retirement plans by making contributions annually to Individual Retirement Accounts, or IRAs. Several years ago a new type of IRA was introduced – the Roth IRA. Certified public accountants and financial advisers cheered the Roth IRA as a useful new tool in retirement savings flexibility and tax efficiency.

Unfortunately, many business owners have traditionally been unable to take advantage of Roth IRAs due to the relatively modest income limitation thresholds.

Now, as we enter 2010, Congress has extended the benefits of the Roth IRA to everyone – regardless of income. Starting in 2010 anyone may convert any or all of their traditional IRA balances into a Roth IRA, and prospectively enjoy all of the tax benefits of the Roth IRA. Yet as is always the case, nothing in life comes for free. The trade off is that the balance in the account becomes taxable income in the year of conversion, and income tax (at the taxpayer’s marginal ordinary rate) will be added to the taxpayer’s year-end tax bill.

So the question facing traditional IRA owners and their financial advisers is simple enough on its face: should I convert some or all of my traditional IRA to a Roth IRA? In the most basic of terms, the IRA owner must weigh whether or not the potential future tax-free growth of the IRA balance is worth the immediate cost of the tax due on conversion. In answering this seemingly simple question, a number of factors must be considered:

l The age of the account owner and the account beneficiaries. Generally, the younger the owner, the more sense it makes to convert.

l The availability of funds outside of the IRA to pay the conversion tax. If a portion of the IRA must be withdrawn to pay the conversion tax and the owner is under age 59 1/2, an early-withdrawal penalty of 10 percent will likely be added to the regular income tax due, resulting in a much longer time frame required to recoup that cost via future tax-free growth.

l Current and projected future tax brackets of the account owner. Taxpayers who believe they will be in higher tax brackets during their retirement years than they are currently (whether due to changes in income, or changes in the tax rates by future Congressional action) may benefit by moving that income into their current, lower tax brackets.

l Whether the IRA funds will be needed by the owner in retirement. Perhaps the most powerful use of the Roth IRA is wealth accumulation for future generations. Because there are no required distributions from Roth IRAs, an account owner can pass any balance in a Roth at death to his or her beneficiaries, who then may be able to withdraw the money over a number of years. This greatly increases the number of years the balance can grow tax free. If it is likely a large balance will remain in the account at the owner’s death, converting may make more sense.

l For younger owners, once the funds have been in the Roth IRA for five years, the amount of converted assets can be withdrawn tax-free and penalty-free at any time. The principal of the account becomes an “emergency fund” of sorts after the five-year waiting period.

For 2010 only, Congress has dangled an additional carrot in front of IRA owners considering a conversion. The tax due on amounts converted in 2010 can at the taxpayer’s election, be deferred until 2011 and 2012 (50 percent of the total tax due each year). This can prove beneficial for taxpayers considering a conversion, but who lack the short-term access to funds to pay the tax.

Many IRA balances are still depressed from the highs of a few years ago, so this may be the most opportune time to consider a conversion. With the 2010 tax filing season upon us, all business owners with significant IRA balances should take the opportunity to discuss with their advisers whether or not a Roth conversion makes sense.

Chris Overturf is an accountant at Latta, Harris, Hanon & Penningroth LLP in Iowa City. He can be reached at (319) 358-0520 or COverturf@lattaharris.com