If you think your tax rate is going to rise sometime in the future, converting to a Roth makes a lot of sense. Withdrawals from traditional IRAs are taxed at your ordinary income tax rate, while all withdrawals from Roths are tax-free and penalty-free as long as you're at least 59 ½ and the converted account has been open at least five years. You do have to pay taxes on any pre-tax contributions and earnings in your traditional IRA for the year you convert. That's why converting before New Year's Eve is smart: You'll pay taxes at current tax rates, which are unlikely to go any lower.

If you're an upper-income taxpayer -- with modified adjusted gross income(AGI) of at least $200,000 if you're single or $250,000 if you're married filing jointly -- you have an even greater incentive to convert in 2012, because converting next year could trigger a new 3.8% surtax on unearned income. (The surtax was enacted to pay for some of the costs of the health-care reform law.) Withdrawals from an IRA aren't subject to the surtax, but they're counted as adjusted gross income and could lift your AGI above the threshold.There is a major caveat, though. We think a major tax reform package could be enacted as early as next year that would lower overall tax rates, while eliminating tax credits and deductions. If that happens, you'd be better off converting after December 31.

Fortunately, when you convert to a Roth, you can change your mind, says Kathy Stewart, director of fiduciary research for fi360, a training organization for financial advisers. If it looks like tax reform is going to lower your tax rate, you have until October 15, 2013, to undo the conversion and turn your Roth back into a regular IRA.

Many clients have significant amounts of unrealized losses from the turmoil in the financial markets.Selling those assets can provide a “bank” of net capital losses. Then the client can sell some of his or her appreciated capital assets, which can be sheltered from tax by the net losses and increase the amount of cash that can be used for a Roth conversion.Suppose, for example, that a financial adviser looks over Richard's financial statements and sees that he has $2 million of portfolio assets. Included are $200,000 worth of stocks and funds bought for $300,000.If Richard sells those stocks and funds, he will have a net capital loss of $100,000. Typically, some of the losses will be short-term and others long-term, but it makes no difference for this purpose.Let's also assume that Richard's adviser helps him select $150,000 worth of stocks and funds to sell at a profit of, say, $30,000. Thanks to his bank of $100,000 worth of net capital losses, Richard will owe no tax on his $30,000 of gains.Moreover, he now has $350,000 in sales proceeds: $200,000 from taking losses and $150,000 from taking gains. Richard can use that $350,000 to pay the Roth IRA conversion tax and keep his entire remaining portfolio in the Roth IRA.