Direct 401(k)-to-Roth Rollovers     Years ago, if you wanted to convert assets in a 401(k) plan to a Roth, you had to make two moves. First, you had to roll over the 401(k) assets to a traditional IRA. Then, you had to convert the IRA to a Roth.     But the Pension Protection Act of 2006 authorized direct rollovers from qualified plans, such as 401(k)s, to Roth IRAs.     Now that the $100,000 dollar cap has been removed, you might take advantage of the 401(k) change. The IRS issued guidance in Notice 2009-75 on this technique. Here are a few key points: If you roll over assets from a designated Roth-401(k), the amount rolled over isn't taxable, regardless of whether it constitutes a qualified distribution or not. Other transfers are subject to tax. The taxable amount is equal to the amount transferred to the Roth reduced by any after-tax contributions. Special rules apply to net unrealized appreciation of company stock in a plan account. A plan participant generally does not owe tax on this appreciation when it is distributed. The IRS Notice clarifies that tax on net unrealized appreciation can't be avoided in a direct rollover to a Roth IRA.

"Anyone may arrange his affairs so that his taxes shall be as low as possible ... nobody owes any public duty to pay more than the law demands." -- U.S. Court of Appeals Judge Learned Hand (1872-1961)

Deal Sweetener: For federal tax purposes, with a 2010 conversion, you can choose to spread the resulting taxable income evenly over 2011 and 2012 and thereby defer the related taxes.

But converting to a Roth isn't always a slam-dunk decision. There are a number of important variables to take into account.

Let's start with the main advantages of converting a traditional IRA, including a SEP or SIMPLE IRA, into a Roth IRA.

• Unlike withdrawals from traditional IRAs, qualifying Roth withdrawals are free of federal income taxes and usually state income taxes too. Generally, qualifying withdrawals involve those taken after you've had at least one Roth account open for more than five years and you reach age 59 1/2.
• Future income and gains earned in the Roth account are allowed to accumulate federal-income-tax-free.
• Roth account owners who reach age 70 1/2 don't have to take the required minimum distributions that must be withdrawn from traditional IRAs. So you can leave a Roth balance untouched for as long as you live. This makes a Roth an ideal asset to leave to heirs if you don't need the money yourself.

• Another great feature about Roth conversions is you can change your mind. You have until October 15 of the year following the conversion year to "recharacterize" the converted account back to traditional IRA status. This amounts to reversing the earlier conversion.

Here are a few factors to evaluate when considering a conversion:

• Even if you can defer the tax owed on a conversion, you should pay for it out-of-pocket. Of course, this could siphon off funds needed for other purposes. But if you're forced to use assets in a traditional IRA for the tax payments, it dilutes the overall benefit.

• The extra taxable income triggered by a conversion is added to your salary, self-employment earnings, investment income, and so forth. So if you convert a large-balance IRA, it could bump you into a higher tax bracket and make you ineligible for some tax breaks, such as the child and education tax credits and passive loss deductions from investment real estate.

• If you begin taking funds out of a Roth IRA before you reach age 59 1/2, and the withdrawals are not covered by one of the qualified exceptions, you will generally have to pay a 10 percent early withdrawal penalty.

• Don't forget to include state income taxes in the calculation.
• Other factors can play a major role in your decision. These include the investment return on assets, your projected life expectancy (and the life expectancies of your heirs), your current tax rate, the likelihood of increasing tax rates and the value of the assets being converted.