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Last year was the perfect storm for converting traditional IRAs into Roth accounts. Previous restrictions on conversions were removed, and you could spread the taxable income triggered by a 2010 conversion evenly over 2011 and 2012. What about this year? Conditions are still favorable for high earners who believe their tax rates in retirement will be the same or higher than their current rates. Here's what you need to know when considering a 2011 conversion.

Conversion Basics

A Roth conversion is treated as a taxable distribution from your traditional IRA because you're deemed to receive a taxable payout from your traditional account with the money going into the Roth account. So a conversion will generally trigger a federal income tax bill -- and maybe a state income tax bill, too. However, two big positive factors may outweigh the current tax hit.

* The conversion tax hit is lower if the value of your traditional IRA has still not fully recovered from the 2008 stock market meltdown.

* More importantly, today's federal income tax rates might be the lowest you'll see for the rest of your life. So you'll pay the relatively low current tax rates on the conversion income and avoid potentially higher future tax rates on the entire post-conversion increase in the value of the Roth account. That's because qualified Roth withdrawals taken after age 59 are totally free of federal income tax.

The conversion strategy is probably a good idea for most higher-income folks, and this year everyone qualifies -- even billionaires. The same was true last year. Before 2010, the conversion option was only available if your modified adjusted gross income was $100,000 or less. While there are no current indications Congress will reinstate the income restriction, you never know. The only certainty is that it doesn't exist right now.

Consider Multiyear Conversion Strategy

The extra taxable income triggered by a Roth conversion is added to your ordinary income from other sources (salary, self-employment income, short-term capital gains, alimony received and so forth). So if you convert an IRA with a large balance, it could push you into a significantly higher federal income tax bracket (say from 25% to 33% or even 35%). The conversion income also increases your adjusted gross income (AGI), which could trigger a bunch of unfavorable phase-out rules, such as the ones affecting the child tax credit and the college tuition credits.

To avoid this, consider converting a large traditional IRA balance (or balances) to Roth status in stages over at least two years. For instance, you could convert half of your traditional IRA balance this year and the other half next year. This multi-year approach could prevent the extra income triggered by converting from pushing you into much higher tax brackets and negating too many AGI-sensitive tax breaks. If this multiyear deal sounds good, I recommend starting this year because the 2011 and 2012 federal income tax rates are probably as good as they are going to get. After 2012, all bets are off.

Don't Forget the Impact of 2010 Conversions

If you are spreading the income from a 2010 conversion over 2011 and 2012, you already have some conversion income on the books for this year and next year. So if you do another conversion this year, your 2011 income will be that much higher. If you do another conversion in 2012, next year's income will be that much higher. Take that into account when estimating the tax hit from a 2011 or 2012 conversion.

Never Fear: You Can Reverse Ill-Advised Conversions

Another great thing about the Roth conversion strategy is you can change your mind. You have until October 15 of the year following the conversion year to re-characterize (unwind) your converted account (or accounts). For example, say you convert a traditional IRA into a Roth account between now and year-end. Then the value of the converted account takes a dive. In this bleak scenario, you would have to pay 2011 income tax on value that disappeared. Thankfully, you have until Oct. 15, 2012, to re-characterize the converted account back to traditional IRA status. It's as if the ill-advised conversion never happened, so you won't owe any 2011 taxes on the now-unwound conversion.