If you qualify, you can convert traditional 401(k) assets to a Roth IRA either directly or by rolling the money over to a traditional IRA first and then doing the conversion. In either case you must pay the full amount of the taxes that are due on the accumulated contributions and earnings you’re converting.
To qualify in 2009, your adjusted gross income for the year, or AGI, must be less than $100,000, not including the amount you want to convert. This limit applies whether you’re single or married.
In 2010, the income limit will be eliminated, so anyone who wished to convert to a Roth IRA will be entitled to do it. In addition, you’ll be able to spread the taxes that are due over two years—2011 and 2012—rather than making a lump sum payment.
If eventual tax-free earnings and no required withdrawals are an attractive addition to your retirement planning, you may want to investigate conversion. However, remember that a Roth IRA must be open at least five years and you must be at least 59 ½ before you qualify to make tax-free withdrawals. It’s a good idea to consult a tax professional to review your plans before making a decision.
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