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Roth IRAs

The IRA Shuffle: From 401(k) to Roth IRA

Now it's easier to slide money into a Roth

Moving money from a 401(k) into a Roth IRA after you left a job used to be a Texas two-step: You had to transfer the assets into a traditional IRA first, then convert that to a Roth. Now you can waltz directly into a Roth.

In order to make such a conversion, your annual adjusted gross income has to be $100,000 or less, whether you're single or married. But come 2010, when the income-eligibility limit disappears, that move will get easier, too.

When you convert to a Roth, you'll owe taxes on the entire amount you roll over -- assuming you made all your 401(k) contributions with pretax money.

But a Roth conversion is still worth considering because all future distributions, including earnings, can be withdrawn tax-free after age 59 1/2, if you've held the Roth for at least five years. Plus, you won't have to take required minimum distributions from a Roth after 70 1/2, as you do with a traditional IRA. And your heirs can inherit the money tax-free.

But don't try this strategy unless you can afford to pay the tax bill with funds outside your 401(k). Tapping your retirement account to pay taxes would mean owing an early-withdrawal penalty if you withdrew the money before age 55. Even worse, you'd lose the opportunity for years of tax-free growth.