A Sweet Deal on Roth IRA Conversions

The ins and outs of converting 401(k) money to a Roth IRA.

UPDATE: Since this story was published, questions have been raised about the strategy it discusses . . . of moving only after-tax money from a 401(k) to a Roth IRA. Although it is not crystal clear, it appears that the IRS believes a rollover of a 401(k) to a Roth IRA would be treated the same as a rollover from a traditional IRA to a Roth -- that is, that the amount of the rollover that would be tax-free would be based on the ratio of after-tax and pre-tax money in the 401(k).

Employees who make (or who have made) after-tax contributions to their employer's retirement plan, listen up. You can now take that money and convert it to a Roth IRA tax-free.To qualify for a Roth conversion, your adjusted gross income may not exceed $100,000, whether you are single or married. But don't despair if you make too much now; income limits on conversions disappear in 2010. Income limits on new contributions to Roth IRAs, however, will remain in effect. In 2009, individuals who make up to $120,000 and married couples who make up to $176,000 may contribute up to $5,000 to a Roth IRA, and $6,000 if they are 50 or older.

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Mary Beth Franklin
Former Senior Editor, Kiplinger's Personal Finance