Paying Taxes on Roth Conversions from the IRA

Conventional wisdom has generally said “don’t do a Roth conversion unless you can pay taxes from outside the IRA” and that’s what I’ve always stuck with over the years. Obviously if a client is willing and able to pay for the conversion outside of the account, that’s the best way to go, but what about the client that partial conversions would clearly benefit, but they have limited liquid funds outside of the IRA (which maybe my clients are strange, but this is pretty common amongst my clients)?

For example, 68 year old couple with $3,000,000 in pre-tax IRA money, and $100,000 between a bank account and a joint account that we don’t want to dry up completely paying for taxes. They take out about $40k a year GROSS from the IRAs now (withholding taxes from the account) but when they turn 72 in four years they’ll have to take out around $135k or so (which they don’t need). I understand that by paying for taxes on the roth conversions from the account, they’re getting less money into the roth and paying taxes on their taxes, but they’re eventually going to have to take out this money anyway (and withhold taxes out of the account).

I suppose the basic question is what’s the difference between taking distributions from your IRA (and paying taxes from your account), and paying the taxes on Roth conversions from your account? Mostly, I’m wondering if I’m crazy to think that doing partial roth conversions when they make sense (factoring in tax bracket, IRMAA charges, beneficiary tax bracket, etc.) and paying taxes from the IRA to cover them is actually something I shouldn’t be afraid to do?