Read This Before You Do a Roth Conversion via Flickr.

Figuring out the best way to save for retirement can be difficult, especially with all the different types of retirement accounts out there. Between traditional and Roth IRAs, 401(k)s, and other employer-sponsored retirement plans, the possibility of making a mistake can lead many would-be retirement savers to procrastinate for years before getting a savings strategy started.

One of the toughest questions facing retirement savers is whether to take an existing traditional IRA or 401(k) and convert it to a Roth-style account. In some cases, doing a Roth conversion can be a smart tax move, but to make the most of it, you have to understand all the ramifications of converting not just on your retirement assets but on your overall financial picture. With that in mind, let's take a look at several important aspects of Roth conversions to think about as you consider this lucrative strategy.

1. Your current tax rate makes a huge difference in whether a Roth conversion makes sense.The most important element in deciding whether a Roth conversion is right for you is your current tax bracket in comparison to what you expect your tax rate to be when you retire. Converting requires you to include the amount you convert in taxable income in the year of the conversion, but it makes any subsequent income or gains on the Roth IRA tax-free. Not converting avoids the current tax, but at the cost of paying taxes on all distributions from the IRA in retirement.

If you're in a low tax rate now, then converting to take advantage of those low rates can be smart, especially if you expect to be in a higher bracket when you retire. If you're in your peak earning years now, though, then Roth conversions won't make as much sense, as you're already likely at your top tax bracket for your lifetime.

Source: Flickr user _e.t.

2. Roth conversions don't have to be all or nothing.Some investors erroneously believe that they have to convert an entire IRA to a Roth. But you can pick a fixed dollar amount and convert that, leaving the remaining assets untouched in the traditional IRA.

That can be especially useful if converting the entire IRA would bump you up into the next tax bracket. By limiting your conversion and spreading it out over multiple years, you can minimize the tax bill and maximize the eventual benefits.

3. Watch out for collateral impact from having higher income after a Roth conversion. A Roth conversion raises your taxable income, which results in your paying more taxes. But your higher income can also cost you some unrelated tax benefits, adding to the total cost of the conversion.

For instance, many tax provisions are tied to certain income levels, ranging from tax breaks for low-income earners to taxes on Social Security benefits for higher-income taxpayers. By doing a Roth conversion, if you raise your income above certain threshold amounts, you can become ineligible for credits or deductions, and you can trigger additional taxes on certain items. That's why managing your Roth conversion is critical to avoid unintended consequences.

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4. Keep in mind the estate-planning advantages of Roth IRAs.Many investors only look at their own tax picture in considering a Roth conversion, but one of the best features of the Roth is its current estate-planning status for your heirs. Unlike traditional IRAs, Roth IRAs don't require minimum distributions under current law, and your heirs can stretch out distributions throughout their lifetimes. That can extend the tax-free nature of the Roth for decades, making it even more attractive for those who can afford to think about the legacies they leave for their children and grandchildren.

5. Remember that you can undo a Roth conversion.The nicest thing about a Roth conversion is that if it turns out it was a bad idea, you can undo it. You have until the tax filing date of the year of the conversion, plus extensions, to do what's called a recharacterization to put the assets back where they were before the conversion. That can give you up to 21 months to see how things go before making a final decision.

Roth IRAs have unique attributes that make them useful for investors, but doing a Roth conversion can have adverse consequences that you need to take into account and weigh against the benefits. In many cases, though, a Roth conversion will still be a good idea even with the cautions discussed above.

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