I'm not normally a big fan of conversion because I don't like paying extra taxes now. But in your case with non-deductible IRAs, the only amount that would be taxable on conversion in 2010 would be the small amount of gain and that taxation would be spread out over 2011 and 2012. UNLESS you have other traditional IRAs including SEP-IRAs and SIMPLE IRAS with pre-tax dollars, in which case the basis comes out prorata and a much larger portion would be taxable.

Once you have converted to a Roth IRA all of the future gain will ultimately be tax free as long as the gain is withdrawn after you've had a Roth IRA for 5 years and met one of the tests for a qualified distribution such as age 59 1/2 or "first-time home buyer."

One caution is that while normal Roth IRA contribution basis comes out tax free and penalty free at any time for any reason, any conversion basis must stay in the Roth IRA for 5 years to avoid the 10% penalty tax.

So if you would owe very little tax, by all means convert in 2010 (or earlier if eligible).

Ari, I don't know much about this topic, but I recently came across this article that might be useful for you: http://www.filife.com/stories/2010-ira-conversion

Ari,
In essence, a Roth conversion represents the opportunity to choose to pay taxes now (when you convert), instead of in the future (when you would have withdrawn).

Which time is better? In the case of the traditional vs. Roth comparison, the most significant driver is pretty straightforward - pay your taxes whenever you think your tax rates will be lower.

So if you expect your tax bracket in the future to be higher than it is today, then converting is a good idea. If you think your tax bracket is higher today and may go down in the future, then hold onto your traditional IRA and wait to take withdrawals when those tax rates go down for you.

All that being said, there's a kicker that helps to encourage a Roth conversion in your situation - the fact that you apparently have some non-deductible contributions in your IRA. The Roth conversion rules only require you to report the value of the account IN EXCESS OF your non-deductible contributions as income, which means you might be able to convert the whole account while reporting only a fraction of it in your income for tax purposes (and only a percentage of that will actually be the taxes you must pay). So you're probably going to find that this is a good deal for you, as long as your tax bracket isn't unusually high this year.

The biggest caveat - be certain that you have the money available to pay whatever taxes ARE due as a part of your conversion. You won't want to take the funds out of your IRA (or new Roth IRA) - that can cause taxes and potential early withdrawal penalties itself, and to say the least will diminish the size of the Roth IRA you were just trying to create. So be certain you've got a taxable investment account or a bank account you can draw on to pay the tax liability!

I hope that helps a little!

From a tax perspective, remember that the grace period applies to income restrictions - it doesn't relieve you of the tax liability

This is where specifics like age, tax bracket and the total of funds in your IRA matter.

Consider these things when making the decision:
1, Contributions made to traditional IRAs are tax deductible while contributions made to Roth IRAs are not. This may be a much needed perk when your income may be higher but your expenses are also higher (speaking as the mother of small kids).
2, Depending on your age and occupation, the tax rate for the conversion may be much higher now than in the future. It may not make sense from a tax perspective to pay at the highest rate now in order to avoid a lower rate later.
3, The market is not performing spectacularly now. Remember that a conversion is taxed as ordinary income. If you convert while is 28% or higher, think about how long it would take to "make up" that portion of your IRA that has now been converted to taxable income.

The bottom line: it may not always make sense to pay up early. Roth IRAs are a great tool for some folks but are not the best answer for everyone.

Consider running various scenarios with your broker and tax professional to see what makes the most sense for you.