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Clark Howard: Convert your old 401(k) to a Roth IRA in 2010

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Roth IRA conversion loophole for 2010

Clark talks about the Roth IRA so much that our executive producer, Christa, often refers to it as his “girlfriend.” Yet despite the penny-pincher’s enthusiasm, only about one in five of us actually has a Roth account.

Well, now there is a gift for 2010 that could encourage Roth-shy investors to get off the sidelines and get in the game. There’s a new provision under the tax code that lets you rollover and convert money — regardless of income — from a traditional IRA or 401(k) at an old job. You simply pay the tax bill over 2011 and 2012 and then it grows tax free.

Let’s take a step back and get an understanding of the benefits of a Roth account. With a Roth, you put after-tax money in and it grows tax-free until you spend it tax-free in retirement. This is markedly different than a traditional IRA or a 401(k), both of which will be taxed in your golden years.

In fact, Clark likes for people to max out their Roth accounts before thinking about other places to put their money. The consumer champ is always upset if an insurance salesperson sells someone an annuity when the customer hasn’t put a single penny into a Roth.

In general, you can make Roth contributions of up to $5,000/year — unless you’re over 50, in which case you can contribute up to $6,000. Those who earn more than $100,000 as a single person or more than $159,000 as a married couple typically can’t do a Roth. However, those restrictions are being waived under this tax code loophole in 2010.

Still not convinced about the benefits of a Roth account? Visit RothRetirement.com and use their calculator to see how much further your money goes in a Roth than in a regular IRA.

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