This client could be one of those that should consider doing incremental conversions every year, possibly enough to fill up their 15% tax bracket. In cases where conversion amounts are designed to control the tax bill for each year and the 100,000 income limit for 2009 is not a factor, for 2010 they would opt out of the 2 year deferral. The reason for this is the two year deferral eliminates any use of the lower bracket in 2010 and concentrates conversion dollars into 2011 and 2012. This would limit the amount of additional conversions that can be done in 2011 and 2012.

With respect to the 401k plan, if there are not considerable after tax dollars in the plan, it is simpler to just do the direct rollover to a TIRA and convert from there. This prevents a plan that only offers a single direct rollover from becoming a problem. Granted, the taxpayer could also do a direct Roth conversion for the entire amount and still recharacterize part or all of the conversion into a TIRA by the extended due date. If he landed a job that increased his income in 2009 over 100,000, he could be forced to recharacterize the entire conversion; or if his income increased his bracket for 2009, he could recharacterize only the portion that would expose higher brackets. There is considerable flexibility here.

With incremental conversions, sometimes it also pays to delay receipt of SS benefits until much of the conversions are done. Meanwhile, the SS benefits will increase up to 8% per year for each year of delay up to age 70, and meantime SS benefits will not trigger the higher marginal rates when up to 85% is included in AGI.

A plan to consider all this still needs to be revisited every year to fine tune it, particularly if something changes along the way.

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