It doesn't look as though we will see much of a recovery on the investment horizon, or at least anything to cause excitement, in the immediate future. The past month has shown some improvement for investments, but the markets still have a long way to go before a total recovery could be claimed.

In times like these, it helps to focus on areas where a little tax planning may go a long way. Some of my clients are taking a "wait and see" attitude toward their investments as well as their tax planning.

In today's environment, it may make sense to consider converting a traditional IRA into a Roth IRA.

Roth IRA conversions have not exactly been headline news lately, and I believe there are two reasons. First, many clients are primarily concerned with just keeping what they have, hoping to stem further decline in their retirement assets. Second, there is an income limitation that prohibits many clients from being able to do a Roth conversion. For the current year, in order to do a conversion, a taxpayer's modified adjusted gross income has to be less than $100,000. While the income limitation may be an issue for 2009, it is scheduled to go away for 2010.

In very general terms, when a taxpayer converts his or her traditional IRA to a Roth IRA, the amount converted is taxable income in the year of conversion; any tax due is payable with the return filed for that year. Intuitively, it doesn't make sense to pay tax now when it can be deferred for as long as it stays in a traditional IRA.

That is even more true when a person is reaching an age where he or she has to begin taking withdrawals, as there may not be enough years for the Roth IRA to grow to make up for the tax paid on conversion, especially if the tax dollars come out of the IRA. So, as with any good tax-planning idea, it must be considered in light of a particular client's facts and circumstances to see whether it makes sense for him/her to convert.

Some outside factors may make a conversion a very good idea, despite the fact that tax may be paid in the year of conversion.

Take the hypothetical situation of Mrs. Smith, who has run a business that has generally been successful. The recent economic turmoil has also impacted her Subchapter S corporation, and the company will pass through a sizeable loss to Mrs. Smith in the current year. Along the way, she has accumulated $500,000 in her traditional IRA.

Mrs. Smith believes that the market will recover eventually and understands why her portfolio has declined to its current value of $300,000. If Mrs. Smith converted her entire traditional IRA to a Roth IRA, the current balance would be taxable to her this year. However, Mrs. Smith will see a sizable loss pass through from her corporation, which may shelter some, or possibly all, of her conversion and, as a result, minimize her tax for the year.

Further, and just as important, her conversion is based on the current amount in her IRA - $300,000 - not the $500,000 she previously had in the account. She, in effect, has eliminated the conversion tax on the $200,000 decline in market value she had in her portfolio. In our example, Mrs. Smith was comfortable that the market would recover at some point; so for her, the advantage of converting was enhanced by the decline in her portfolio, as she will pay no conversion tax on the recovery.

That example, while simplified, illustrates an important concept. Granted, not everyone may be able to shelter his or her IRA conversion with a pass-through loss, but some clients have net operating loss carry-forwards, charitable contribution carry-forwards, unused tax credits or AMT credits that may absorb the tax. Again, each client's situation is different and should be evaluated on the specific facts and circumstances.

It is also important to note that a taxpayer can do a partial conversion of an IRA rather than a full conversion.

Revisiting the Mrs. Smith example, what if she does the conversion and, post conversion, her portfolio declines by another 30 percent? In effect, she has paid tax on a much higher amount than she now has in the Roth IRA. In that situation, Mrs. Smith can recharacterize her Roth IRA back to a traditional IRA and essentially undo the entire transaction. The recharacterization must be completed by the due date of the tax return for the year of conversion, so, assuming that she's granted a filing extension , it is possible that Mrs. Smith would have nine and a half months to see whether she should recharacterize her assets to undo the Roth conversion.

Each situation is different, but there are a few fact patterns where the conversion makes sense. First, where a client has some type of loss, deduction or credit carry-forward that can offset the tax, the conversion can be advantageous.

Second, where the taxpayer has resources outside of the IRA itself from which the tax will be paid, the conversion may make sense. This eliminates reducing the amount that will remain in the IRA to grow tax-free.

Third, since there are no mandatory distributions out of a Roth IRA at age 70½, the money can stay invested for a much longer time. The power of compounded returns over a longer horizon can produce significant results for the IRA beneficiary. When this set of facts is present, a client may not only wish to consider a Roth conversion, but also consider changing the IRA beneficiary to a child or grandchild and stretching out the distributions over both lifetimes, potentially.

One additional planning point to think about when considering our hypothetical Mrs. Smith scenario: What if, in Mrs. Smith's original $500,000 portfolio, there were assets, some of which were highly appreciated and some which were significantly depreciated? If she converted the entire IRA, part of the original planning idea of using the unrealized decline in market value to leverage her tax savings would be lost, as all of the assets inside the IRA are deemed converted.

To take this issue off the table, before Mrs. Smith does her conversion, she could break up her traditional IRA into two IRAs: one holding appreciated investments and one holding depreciated investments. She could then convert the depreciated-investment IRA and inure to the benefit of leveraging her tax savings.

While the weak economy impacts all of us, it may still be possible to do some value-added tax planning for your clients and, at the same time, allow them some time to see if your planning worked. Each client situation is different, and Roth IRA conversions can become complex very quickly.

Mark Tronconi, a CPA, is a tax partner at the Williamsville-based accounting and consulting firm Tronconi Segarra & Associates LLP. He can be reached at mat@tsacpa.com.