A lot of people are converting their regular IRA or old 401(k) plan into a Roth IRA in 2010. That’s because Congress lifted a number of restrictions on these conversions this year. It also gave people who convert in 2010 a special one-time benefit: Rather than reporting the resulting income on their 2010 tax return, they can choose to report nothing for 2010, and then report half the income on their 2011 return and half on their 2012 return.

However, you might be better off recognizing all the income in 2010. To decide, you’ll need to do some tax homework.

In general, with a Roth IRA there’s no tax deduction for contributions, but withdrawals are tax-free. Depending on your circumstances, Roth IRAs can be better for estate planning, because:

• There are no required minimum distributions during your lifetime. So if you don’t need the IRA funds to live on, you can leave the entire IRA to your heirs without having it diminished each year.
• Your heirs won’t have to pay income tax (federal or state) on their withdrawals.
• If tax rates go up (which seems likely), you’ll save because you can contribute after-tax dollars at today’s rates, and won’t have to pay taxes on withdrawals at a higher rate in the future.

On the other hand, if you convert an existing account to a Roth, the amount you move to the Roth is considered taxable income to you, and you have to pay income tax on it.

If you’re thinking of converting in 2010 – or if you’ve already converted – you’ll have to decide whether to take advantage of Congress’s offer to spread the resulting taxable income over 2011 and 2012.

Ordinarily, it’s always better to pay taxes later rather than sooner, and to spread taxable income out over multiple years. But in certain circumstances, it might be better to recognize the income in 2010. For instance:

• Many tax deductions and credits phase out if you have a certain level of income. A big spike in taxable income could deprive you of these benefits. You might be better off recognizing all the income in 2010 and losing this advantage in only one year rather than two.
• A higher level of income can result in Social Security benefits being taxed, and can raise Medicare Part B premiums. Again, you might want to have this happen in only one year rather than two.
•  If your child is applying for college financial aid, you should be aware that most colleges don’t consider money in retirement accounts when calculating an award of aid, but they do consider income. This could factor into choosing which year or years you want to report a spike in your taxable income.
• If you think tax rates will go up in 2011 and 2012 for high earners, you might want to recognize the income in 2010 and pay taxes at the 2010 rates.