BOSTON (MarketWatch)—Good news if you’re among the millions of Americans who have a 401(k) plan. The so-called fiscal-cliff bill includes a provision that lets workers with 401(k)s, 403(b)s and other defined-contribution plans convert to a Roth at any time.

Under previous regulations, plan participants could only take such a step after three qualifying events: Changing jobs, retirement, or reaching age 59½.

“Basically, the new rule simply means you can now do intraplan 401(k) conversions from traditional to Roth in the same manner you can do so for IRAs,” according to Michael Kitces’ blog, the Nerd’s Eye View.

Kitces notes in his blog, ATRA will now allow individuals to convert their existing 401(k) plan to a Roth 401(k) plan, if the employer offers designated Roth accounts under the plan, regardless of whether the individual is allowed to take a distribution out of the plan.

But even if you’re able to do a conversion doesn’t mean that you should, say experts. In fact, deciding whether a Roth conversion (inside a 401(k) or with an IRA) is a good deal or not depends on several individual-specific factors, according to Kitces, who’s written extensively about the subject.

Read “Roth vs Traditional IRA: The Four Factors That Determine Which Is Best.”

One of the first rules is that Roth conversions are not for everyone,” said Denise Appleby, the CEO of Appleby Retirement Consulting. “No financial or tax strategy comes in a one-size-fits-all box, and that includes Roth conversions.”

So when might a Roth conversion make sense?

Appleby said the following are some of the cases in which Roth conversions may make sense:

• The IRA owner wants to leave a tax-free inheritance to his beneficiaries, and does not care how much it costs him to pay the taxes now, even if it would cost more if he pays the taxes instead of his beneficiaries paying the taxes.
• The results of comprehensive Roth conversion analysis shows that a Roth conversion will very likely make good tax/financial sense.
• The IRA owner is at the lower end of the tax-rate scale now, and will very likely be in a much higher tax-rate scale as his income increases including during retirement.
• The IRA owner has enough deductions and tax credits to offset the tax bill that would be due on the Roth conversion.

Appleby also noted that income tax is only one of the many factors that need to be considered when deciding whether a Roth conversion is suitable or not. “Individuals should consult with a tax or financial professional who can perform a Roth conversion analysis to determine suitability,” she said.

Jeffrey Levine, an IRA technical consultant with Ed Slott and Company, said tax and financial software can be a great tool to help a person understand the consequences of a conversion.

However, when it’s time to decide whether it’s a good move to do a Roth conversion or not, Levine likes to focus on what he calls “The 3 Big Questions.”

The first question is when will you need the money, Levine said. “If the answer is soon, say 10 years or less, the Roth conversion usually doesn’t make sense,” he said. “If they don’t plan on using the money until later, the Roth might make sense.”

The second question is where the money to pay the tax on the conversion is going to come from. “If someone has to take money out of their IRA or Roth IRA to pay the tax, it almost never makes sense to convert,” Levine said. “The numbers just don’t add up. So there generally has to be enough ‘outside’ money to cover the cost.”

And third question is what your future tax rate will be. And the answer to this question depends not only on future tax rates, but future income. “In the past, most of the client’s I’ve worked have felt their tax rates would be higher in the future,” he said. “I think it will be interesting to see how the new ‘permanent’ income-tax rates affect answers to this question.”

Diversify tax risk

Ben Norquist, the president and CEO of Convergent Retirement Plan Solutions, has a different point of view. “Given the fact that Roth savings can help individuals diversify their tax risk as well has help provide them with greater withdrawal flexibility after reaching age 70½, we think the best approach is to get people thinking about what portion of their overall tax-sheltered savings should be allocated to Roth savings as opposed to looking at the Roth conversion question as an ‘all-or-nothing’ proposition,” he said.

Historically, many have made the mistake of being overly simplistic when it comes to gauging the potential benefits of Roth savings from a tax-risk perspective, Norquist said. “Since overall taxable household income is often less in retirement than prior to retirement, some have historically argued that most individuals will not benefit from Roth savings as their top marginal tax bracket in retirement is likely to be comparable, or perhaps even lower, than the top marginal rate they were subject to prior to retirement.”

This simplistic argument fails to account for two fundamental considerations, he said. “One, by having one’s retirement savings diversified between traditional pretax savings and Roth savings, one is afforded significantly greater flexibility in navigating the complex, ever-changing federal tax laws, said Norquist.

For example, one might be able to avoid increased taxation of his or her Social Security benefits, or avoid increased Medicare premiums by using tax-free Roth withdrawals to keep taxable income below a given threshold.

And two, given the country’s overall fiscal situation, many believe marginal income-tax rates are likely to rise in the future for all taxpayers—notwithstanding the recent legislation extending the Bush-era tax cuts for the majority of American taxpayers, said Norquist.

Another advantage of doing a Roth conversion is that it gives you what Norquist calls withdrawal flexibility. “Unlike traditional IRA and traditional 401(k) savings, Roth savings are not subject to mandatory distribution requirements once an individual reaches age 70½,” he said. “While this Roth feature is of little advantage to those who anticipate withdrawing an amount equal to (or greater than) their ‘required minimum distribution’ or RMD, this feature can provide significant tax shelter extension for those who are able to take advantage of it.”

By delaying withdrawal of tax-sheltered savings beyond age 70½ (or, even withdrawing something less than the conventional RMD amount), Norquist said “you are able to increase the leverage of their tax shelter, either providing increased security for future retirement years, or increasing the value of a financial legacy that can be left to heirs on a tax-sheltered basis.”

Norquist noted that Roth 401(k) amounts that remain in a Roth 401(k) beyond age 70½ do become subject to the required distribution rules, but this drawback is easily overcome by rolling one’s Roth 401(k) amounts to a Roth IRA prior to the year you turn age 70½, thereby avoiding the RMD requirements.

As for the conventional wisdom that suggest that you should only consider a Roth conversion if you have the financial resources available outside of your retirement savings to pay the tax due on a Roth conversion, Norquist had this to say: “While this general rule of thumb is typically accurate for someone under age 59½ who would likely incur a 10% early withdrawal penalty as well as income tax liability on any retirement savings used to pay for the conversion, it should be taken with a grain of salt by those over age 59½,” he said. “While paying for a Roth conversion with ‘outside savings’ (i.e., savings that are not taken form a tax-sheltered account) is typically the most advantageous way to convert, individuals over age 59½ should not rule out a partial Roth conversion simply due to the fact that they would need to use retirement savings to pay for the conversion.”

Concerns about the new provision

For the record, Levine also expressed a big concern about the new in-plan conversion feature: It doesn’t allow for an in-plan recharacterization—the ability to undo the conversion.

“I think this new provision will prove to be a double-edged sword,” he said. “On one hand, it opens up new Roth possibilities for many workers and I suspect many of them will look to seize on this opportunity.”

His fear, however, is that the lack of a recharacterization option will come back to haunt many of these converters. “For instance, what happens when one of these workers loses their job and can’t afford to pay the tax on the conversion anymore?”

If the conversion was made to a Roth IRA, there’s no problem. “But there’s no mechanism to recharacterize an in-plan conversion so that tax bill is going to have to be paid one way or another,” Levine said. “And IRS is not a creditor you want to owe money to. It’s one of the few debts you can’t wipe out in bankruptcy.”

Another question he posed: What happens when someone converts $1 million is their plan, but the market tanks and by the following year it’s only worth half that? Well, if it’s an in-plan conversion you’re stuck paying tax on $1 million even though you now only have $500,000.

Robert Powell is a featured writer on the MarketWatch Retirement blog, a Research Fellow at the California Institute of Finance, and  a Featured Contributor here on the CIF blog.