Backing Up BitCoin-QT

You can backup the encrypted wallet.

What the backup function does is make a copy of the wallet.dat that's found at "C:\Users\Your Username Here\AppData\Roaming\bitcoin-qt\" (Win7) and place it at the specified location. The Wallt.dat includes the private key and and address pairs that are owned by you. In contrast to common believ it does not directly include your balance. The balance of each of your addresses is stored in the blockchain.

So quick and easy:

1) No you do not have to decrypt prior to backup. In fact you should ALLWAYS keep the wallet encrypted and use a secure pasphrase (more than 14 characters consisting of letters, numbers and signs). Especially the backup should be safely encrypted so it is still secure even if it falls in someones hands that should not get it. Allways store the backup on an USB stick or similar not on the same machine as the bitcoin client.

2) A backup is exactkly made for that very scenario. As I explained it stores the Private Key - Address pairs that are yours. If you have to reinstall Bitcoin-QT you can simply restore the backup to get access to the funds of those addresses. The balance of those addresses is taken from the blockchain. Thus a backup is only needed after making new addresses but not after each transaction.