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Quick question: can you roll your existing 401(k) balance directly to a Roth IRA? The answer: yes. Well, actually, maybe...

Before you get too excited about the details it's important to remember that most of us aren't able to roll monies out of our 401(k) unless we have a new job and a new 401(k).  Yes, there are exceptions to this rule, but if you're employed by Employer A your money is likely stuck in Employer A's 401(k) plan until you are no longer an employee.

With that bit of housekeeping out of the way let's talk about rollovers.  The old rules stated that rollovers from traditional qualified plans (a 401(k), for example) could not be rolled directly to a Roth IRA. Instead, rollovers from a 401(k) had to go to a Traditional IRA as the first part of a two-step process.

The second, more painful step was to convert the Traditional IRA to a Roth IRA (a "Roth Conversion"). The aforementioned pain came from the fact that the conversion makes the balance in the Traditional IRA taxable. Finally, there was - and continues to be - a stipulation that the individual performing the conversion had to have less than $100,000 in adjusted gross income (AGI). This $100,000 limit does NOT include the income created by the conversion itself.

Due to a rarely seen act of simplification these rules have been rewritten and the process is now just one step. As of 2008, rollovers from a 401(k) to a Roth IRA are now allowed. Details of the new rules are found in the updated version of Section 824 of the Pension Protection Act of 2006 and are also found at the following link: http://www.irs.gov/pub/irs-drop/n-08-30.pdf.

Unfortunately, as was the case prior to the change, eligibility to perform a Roth conversion is still contingent on having AGI of less than $100,000. Interestingly, the $100,000 limit is the same for single or married individuals.

While this is good news it shouldn't necessarily cause a rush to action. It may be a good idea to convert your existing pre-tax savings to a Roth IRA. Then again, it may not. Your age, your current marginal tax rate and your current income are all considerations - as is the length of time you think you will be able to realistically leave this money untouched before beginning to withdraw it for living expenses. Compounding is, after all, the main driver behind all that is good about a Roth IRA.

One last note that should be mentioned is that the $100,000 AGI limitation is currently set to expire in 2010. Theoretically, this means that anyone, regardless of their AGI, will be able to perform a Roth conversion in the year 2010.

Many planners are encouraging clients that otherwise make too much to contribute to a Roth IRA (yes, there is a limit on that as well) to instead put that money in a Traditional IRA as a non-deductible contribution. Carrying this idea forward, these Traditional IRA balances will then be converted to Roth IRAs in the year 2010 - with taxes only applying on the small amount of earnings that would have taken place as the contributions were after tax (assuming our markets cooperate and that there are indeed gains/earnings in 2008 and 2009).

This window in 2010 may still be there when the year itself actually arrives - then again it may not. Many newer, beneficial aspects of the tax code were set to expire in 2010 and were only given permanent status by a largely lame-duck Congress in late 2006. What will actually happen to the AGI limitation after 2010 is anyone's guess. In the meantime the rule changes are giving many people access to a one-step solution that previously wasn't available, and it's always nice to have options.

Marshall J. Cobb, CRSP, is president and founder of Cobb Retirement Solutions, LLC., an independent, fee-only firm offering qualified plan analysis and oversight exclusively to corporations and organizations. Cobb's first-hand knowledge as a veteran representative of retirement plan vendors beginning in 1990 gives him a unique perspective as he advises his clients. Cobb runs his office -- based in Houston, Texas -- with employees and clients across the country.

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