When November arrives, many investors get serious about reducing the year’s tax bills by “harvesting” losses on stocks, bonds or mutual funds. Usually, investors are urged to put the cash from sales back to work in new investments as soon as possible.

But this year it could pay to keep a healthy chunk of cash on the sidelines. Reason: You may want it to pay tax to convert a traditional IRA, 401(k) or similar plan to a tax-free Roth IRA.

Come January, any investor will qualify for a Roth conversion, as the government has eliminated a long-standing rule that permitted conversions only by investors with modified adjusted gross income of $100,000 or less, a figure that applied to both individuals and married couples filing joint returns.

Now the door will open for millions of people who have been blocked from the Roth. Income tax must be paid on converted sums, but for conversions done in 2010 the tax can be divided between the 2011 and 2012 tax years, making the bite easier to swallow. There’s nothing to prevent you from getting the tax bill out of the way in 2010 if you choose. Interest earnings on cash are so low you’d gain little by holding off on the payments.

Deciding whether a Roth is right for you is a tricky and somewhat imprecise business.

Many investors with traditional IRAs — and all investors in 401(k)s — receive tax deductions on contributions. Deductible contributions and investment gains are not taxed until they are withdrawn, when they are taxed as ordinary income. With Roths, there is no deduction on contributions, but those funds, as well as all investment gains, can be withdrawn tax-free.

Also, the Roth investor doesn't have to start taking required minimum distributions after turning 70 ½. This makes the Roth especially appealing to people who hope to leave the accounts to children or other heirs.

For a full rundown on Roth features look at IRS Publication 590. Morningstar (Stock Quote: MORN), the market-tracking firm, has a good explanation on its site, as does mutual fund company T. Rowe Price (Stock Quote: TROW).

To make the maximum contribution to a new Roth account, individuals and couples filing jointly must have adjusted gross incomes below $120,000 and $176,000, respectively. Those rules remain in effect even though the income limits on conversions are being lifted.

A conversion is most likely to pay if you expect to be in a higher tax bracket when you eventually make withdrawals. In this case, you pay tax at today’s lower rate to avoid tax at a higher rate later. Use the Roth IRA Conversion Calculator for guidance.

Figuring future tax brackets, of course, involves a lot of guesswork. It’s hard enough to estimate your future income, but in addition no one knows how the tax laws might change. Given the soaring federal budget deficit, it seems more likely that tax rates would rise rather than fall. That would appear to strengthen the case for converting.

Some investors worry that the government could eliminate the Roth’s tax-free status, but it would be a very extreme step to impose a new tax on accounts that had already been taxed in a conversion. For now, it seems safe to assume that if you convert to a Roth in 2010 and pay the tax bill, future withdrawals would be tax-free as promised.

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