Thanks to a short-term tax break that expired in December, last year the big buzz among IRA holders was: Is this the right time for a Roth conversion?

Less attention was paid to the question of converting a traditional 401(k) to a Roth 401(k) -- mainly because no mechanism existed to enable such a conversion until September 2010, when President Barack Obama signed a bill allowing conversions within workplace retirement plans.

So now the question is: Should you convert your 401(k) or 403(b) plan to a Roth?

In the first place, your employer plan must include a Roth 401(k) or Roth 403(b) option. Many still do not. And separately, your plan must allow such a conversion.

Popularity of Roth 401(k)s

Roth 401(k)s have been growing in popularity since the Pension Protection Act of 2006 granted them permanent status (originally they were set to expire in December 2010).

Still, they're not exactly ubiquitous. A study released last fall by Hewitt Associates found that 29% of mid- to large-size companies offered it to their employees, though 25% more indicated they were likely to add it.

Fewer companies allow a conversion. A November 2010 survey from Mercer, a human resource consultant group, found that only 17% of plan sponsors were allowing Roth 401(k) conversions in 2010, though 14% said they would add the conversion feature in 2011.

But many employers -- 45% -- have no plans to implement the changes.

That may be because many employees don't take advantage of a Roth 401(k) option even if their employer offers it, says Amy Reynolds, a partner in Mercer's retirement, risk and finance business.

It's true. In the Hewitt study, 4% to 22% of plan participants with access to a Roth elected to invest in it.

"If you have low numbers using the Roth option, do you want to go to the trouble of adding the Roth conversion?" Reynolds asks.

Besides getting employers onboard with offering Roth 401(k) conversions, a few other hurdles stand between workers and what the Internal Revenue Service calls an in-plan Roth 401(k) rollover.

Requirements for Conversion

Three requirements must be met before employees can convert their 401(k) accounts to Roth 401(k)s.

*The plan must offer all workers the option of making Roth contributions.

*The plan must allow Roth 401(k) conversions.

*The contributions to be converted must be eligible for distribution.

The third requirement bears further explanation.

To qualify for a penalty-free distribution, employees must be old enough or changing jobs or disabled or dead. The latter two conditions would be tough to meet for this purpose, but the age requirement is the stickler: Participants must be age 59� before they can convert to a Roth 401(k).

Employer contributions, in the form of employer matches and profit-sharing contributions, may be converted before the participant reaches retirement age, however.

"The plan could permit you to convert that money once it's vested -- if it has been in the plan for two years or if you've been a participant for five years," says Judy Miller, chief of actuarial issues and director of retirement policy for the American Society of Pension Professionals and Actuaries.

Remember that plan rules vary from employer to employer. The IRS guidelines may be more lenient than what is permitted by your plan.

A taxing Decision

Once you're eligible for converting to a Roth 401(k), a second hurdle emerges: paying taxes on the conversion.

Taxes must be paid because contributions to a 401(k) are made on a pretax basis. Contributions to a Roth 401(k) are made after taxes.

Therefore, moving money out of the regular 401(k) and into the Roth 401(k) is a taxable event. Tax is owed on the entire value of the conversion -- contributions and earnings -- in the tax year the conversion is done.

And there's the rub: Workers will need a bundle of cash to pay Uncle Sam to convert.

"You really need to have money from another source to pay the taxes. If, in fact, you take the money out of the plan to pay the taxes, you have taken a distribution which is taxable to you," says Beth Gamel, CPA and executive vice president of Pillar Financial Advisors in Waltham, Mass. Translation: You'll pay taxes on the money that you withdraw for the purpose of paying taxes.

Paying the tax with funds from the employer-sponsored plan lowers the amount you have saved for retirement and can diminish the benefit of converting to a Roth.

Other Considerations

Participants under age 59� in plans offering the option of converting employer contributions would want to avoid paying taxes with funds from their 401(k), even if their plan would let them get the money out, as there would be a 10% penalty on the early distribution in addition to taxes owed.

Timing may be important when it comes to converting from a 401(k) to a Roth. If the market is soaring and your investments have increased in value, more taxes may be owed on the earnings.

"This law only passed in the fall and the market has gone up a lot, so if your plan is at a really high level you might be paying a lot more in taxes than if you had done it last January," Gamel says.

Unlike a Roth IRA conversion, workers can't change their minds after pulling the trigger on the rollover. Participants in a 401(k) do not have the option of recharacterizing their 401(k) conversions.

"With the traditional IRA to Roth IRA conversion, if you see that the market goes down precipitously between now and when you have to file your tax return, you can recharacterize, or get out of it -- basically saying, 'Stop the clock! I didn't really do that conversion and I'm putting all my money back into my traditional IRA,'" says Gamel.

No such option exists for 401(k) conversions; workers will have to divine the best time to do their conversion.

Despite the burden of paying a mint in taxes in one year, converting to a Roth 401(k) can be advantageous for some workers.

Aside from tax-free withdrawals in retirement, Roth 401(k)s have another advantage. Unlike Roth IRAs, which have no required minimum distributions, Roth 401(k)s do require that you take distributions by age 70�. But you can get around this rule by directly rolling over your Roth 401(k) to a Roth IRA when you leave your employer. That way, retirement money that doesn't get used up in this lifetime can be passed on to heirs in the future.

For more information about Roth 401(k) plans, see Bankrate's story, "Roth IRA, 401(k): What's the difference?"