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It looks like dharmadollars made some pretty good suggestions. I don't think I would have thought of anything like that because there's a lot of tax planning going on, and taxes are complicated. If you're up to any of those strategies, by all means, go for it, and you will probably minimize the tax consequences as much as possible.

I would personally, though, go for something less complicated. The most important thing is to avoid using any of the money you're transferring to help pay taxes. Not only will you be paying the penalty for early withdrawl, but you'll have that much less money in your IRA. You want to have as much money in your IRA as possible, and the only good ways to get it there is the transfer from your 401k, or the measly $2000 a year contributions. If you can put $7000 in there all at once, don't waste it... put it all in.

If you can't afford to pay all the taxes at once for the Roth conversion, why not just transfer your 401k to a traditional IRA? I could be wrong, but I don't think you would have to pay any taxes for transferring to a traditional IRA. Then you can convert to a Roth when you are able to pay the taxes out of pocket.

A couple of questions to which I don't know the answers - Can a person convert PART of a traditional IRA to a Roth? Can a person transfer a 401k to more than one IRA? If either of these answers are yes, then you could put your money into a Roth little by little. Of course, I don't know... the answers could both be NO, and then you'd be out of luck.

These are all just my opinions and ideas. I'm (obviously) no tax genius.
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