All you need to do is pg_dump your database, compile your new PG, and reload the dump. There might be problems in the dump file regarding ordering (sometimes things are referenced before they're defined in dump files, already fixed for known cases in the current PG 7.1 sources, so you don't have too suffer this much longer). If you run into this, it's not a big deal - the dump is just a text file with a bunch of CREATE commands to build your schema and COPY commands to add the data.
I did this with my own system, changing from type TEXT to type LZTEXT at the same time (by editing the dump) and had no problem.
7.1 is due out this fall.
The size limit is on the row itself, i.e. a row in the database is limited to the size of a database block. 7.1 will store large columns outside the block automatically (much as you do "by hand" in Oracle with CLOBs etc).
