It may make sense in your case, or it may be overkill. Actually, the taxes would come out of the TIRA, not the Roth, but it would also mean that you would convert less than otherwise. The conversion decision is complex and can involve the analysis and weighting of several different factors in your personal situation. The prime factor is the tax rate you will pay for the conversion vrs what you think you will be paying in retirement as an average marginal rate. And what you will pay in retirement is driven by your own success in accumulating assets and what happens with future tax rates for everyone. Most pundits expect tax rates to rise in the future because the day will come when there is no choice but to pay down some of this debt. But this does not mean that the tax increases will be strictly income taxes. Congress may well pass a value added tax, the size of which will affect the income tax rates in the future.

What you have been doing in the past with the incremental conversions with taxes paid from outside funds makes good sense assuming that you should convert at all. It puts a lid on the marginal tax rates you are paying for the conversions and makes it more likely that you will not pay more than you would have in retirement without converting.

Paying taxes out of the TIRA distribution means that you are being taxed on funds that never get into the Roth and are lost to either type of retirement account. Moreover, if you are under 59.5 you will owe the 10% penalty on the amount withheld. This rarely makes sense, but if it were ever recommended it would be for someone who is asset rich overall and very heavy in pre tax retirement funds and light in Roth assets, but the assets are tied up and there is no other sensible way to generate the cash needed for the tax bill. The net result there is that the TIRA balance is reduced rather than other after tax assets. Doing this when you are 59.5 or have a different penalty waiver makes this more likely to make sense, but even that it is not wise in the vast majority of cases.

If someone was to consider this, the need to spend extra effort to analyze the benefits of conversion is critical, because paying the taxes out of the IRA increases the cost of the conversion considerably.

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Here is an article with some recommended sites and links. Because of the effective marginal rate increase caused by incorporating SS benefits into your AGI, it is usually beneficial to complete most of the conversions prior to filing for SS. If you convert while collecting SS benefits it will usually result in 85% of SS being added to your AGI and even while you are still in the 15% bracket, the marginal rate is 1.85 X 15% = 27.75% until all the SS is included. Sometimes this occurs before the top of the 15% bracket, so the marginal rates go from 27.75, down to 15% after SS included up to the top of the bracket, then 25%.

However if you have enough pension, rental or investment income and perhaps some wages that along with the conversion you would be in the 25% bracket without SS income, then filing for SS would result in a rate of 1.85 X 25% = 46.25% while SS income is added to AGI. Therefore it can be beneficial to delay SS filing until most of the conversions are done, and of course you get an annual bump of 8% a year after 66 and somewhat less than that between 62 and 66.

The other factors , such as the chance of a substantial inheritance or the exposure to high LT care expenses are not directly recognized by these calculators, so you have to manipulate the input yourself with a projection of what these factors would do your marginal tax rate, ie the first would increase the rate and the second would reduce the rate due to the medical tax deduction.

http://www.investmentnews.com/article/20091215/FREE/912149972

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