The Roth IRA conversion floodgates are open. But while the attraction of "tax-free forever" can be powerful, Roth conversions can trigger unintended tax traps and financial problems that are often not addressed until it's too late. Here are five of the most common traps:

NEW FORMS

The beneficiary form is the single most important estate planning document when it comes to IRAs and Roth IRAs. While every custodian will have its own procedures for a conversion, a new account is generally established. As with any other new retirement account, the new Roth IRA must have beneficiary forms submitted with it. What's more, not having beneficiary forms for a Roth IRA is even worse than not having them for a traditional IRA.

Why? Absent favorable default provisions in the custodial agreement, an individual who inherits an IRA without being named on the beneficiary form will not be considered a designated beneficiary. In such a case, if the IRA owner died before the required beginning date (RBD), the account must be emptied within five years. If the IRA owner died after the RBD, then the distributions may be stretched over the IRA owner's remaining single life expectancy, had he or she lived.

But a Roth IRA has no required distributions. So if there is no designated beneficiary, the account must always be emptied within five years after death.

PARTIAL CONVERSIONS

By now, most financial advisors know that when you have after-tax money in an IRA, you can't just convert those funds and pay no tax on the conversion. Instead, when there is a partial conversion of IRA assets, a pro-rated amount of after-tax money-or basis-is included with each dollar converted. The formula for calculating this amount is [(total basis in all IRAs/total value of all IRAs) x amount converted].

So where is the tax trap? Unless you wait until the last second and do a conversion on Dec. 31, you won't be able to do an exact calculation. Why? Because the total value of all IRAs (including SEP and SIMPLE IRA balances) used for the denominator in the pro-rata calculation comes from the balances on Dec. 31 of the year of conversion. That could leave some clients paying a little more (or less) in taxes than they originally planned.

For example, assume Sally did a Roth conversion on Jan. 4. On the date of conversion, the total value of all her IRAs is $50,000, of which $20,000 is aftertax contributions and $30,000 is pretax contributions and/or earnings. The tax-free percentage at this point is 40% ($20,000/$50,000 = 40%), and the remaining 60% is taxable. Sally decides she would like to convert half the value of her accounts to a Roth. This might lead you to believe that she will only have $15,000 of taxable income from the conversion ($25,000 x 60% = $15,000).

But the total value of Sally's IRAs (the denominator) isn't determined until year-end. So, let's say Sally makes some great investments and, by the end of the year, the $25,000 that was left in the traditional IRA has grown to $75,000. Now, the denominator, which includes the converted amount, is increased by the $50,000 growth in account value, so the new tax-free percentage is 20% ($20,000 basis/$100,000 total value of all IRAs at year-end). That means the taxable percentage is 80%. Instead of $15,000 of taxable income generated from the $25,000 conversion, Sally now has $20,000 of taxable income. If you have clients who try to calculate their conversions to the penny, this is certainly something you should share with them.

LATER ROLLOVERS

Another big tax trap can occur when clients change the equation by rolling plan money into an IRA in the same year that they make a Roth conversion. When an IRA is converted, only IRA assets fall under the pro-rata rule. Plan assets have no effect.

For example, let's say Allen has a $50,000 IRA, $25,000 of which is non-deductible contributions and $25,000 earnings. He also has a 401(k) worth $450,000 (all pretax). If he converts the entire IRA, he will only owe tax on $25,000, since the plan assets are excluded from the pro-rata formula.

But let's say Allen changes jobs mid-year. Knowing that IRAs are generally better for clients than company plans, you advise him to roll his 401(k) to an IRA. Like a good client, he listens to your advice and rolls the money right away. You just cost Allen thousands in taxes. Why? Remember, it's the end-of-year IRA balance that determines the denominator for the pro-rata calculation, not the balance on the date the IRA is converted.