Gary,
You are correct that since you are over 59.5 and your first Roth IRA was apparently established prior to 2005, your Roth accounts are now fully qualified for tax free distributions.

Your conversion philosophy is sound as well, since limiting the tax cost of conversions to the rate you will average in retirement is important if the conversion choice is to be sound. Converting in kind vrs a cash conversion merely means that you are attempting to retain the best assets for appreciation in the Roth IRA. Converting in kind really only avoids the transaction costs to sell and re purchase holdings in the Roth.

In doing a series of partial conversions, you will probably want to opt out of the two year deferral for your 2010 conversion for two reasons. First, you are not converting a huge amount that would otherwise be taxable in a single year, and second, if you defer the taxes you do not get to use your lower bracket at all for 2010 conversions, so that bracket is permanently lost for conversion use.

In trying to select the top of the 15% bracket for instance, you can either micromanage your taxable income so that you can fine tune the conversion amount in December, OR you can just convert a comparatively large amount early in the year with the idea of recharacterizing the excess in the following year when your taxable income is fully known. You can then get the 15% bracket filled right up to the last dollar. You can even convert even larger amounts with the idea of retaining only the best performing conversions. If you elect to do that, make each conversion into a new Roth account number to the earnings will not be commingled with other assets or conversions.

It is best to pay the conversion taxes with non IRA funds. Paying quarterly estimates equal to 100% (or 110% for higher incomes) of the previous years taxes is the usual method, although you can also withhold from any pension or even social security payments later on. If you do not have the cash to pay the taxes, it suggests that you might be over doing the conversions as a share of your total retirement assets. This is difficult to quantify without knowing what type of assets you have in both taxable and retirement accounts. If you have to pay the taxes out of the IRA distribution, these tax dollars will be diverted from retirement accounts rather than from non tax deferred assets. In certain cases, this may be OK, but much more would have to be known.

Another option that ties into the above is when you plan to begin SS benefits. Conversions can make more of your SS income taxable, and that creates a “bubble bracket” where 15% becomes 27.75% if 85% of your SS income becomes taxable. 25% becomes 46.25%. After 85% of your SS has been included the rate can drop back down, but by then you might be close to the 25% bracket anyway. This means that if you can afford to, delay SS benefits for awhile and wipe out the penalty for claiming then prior to age 66. There are so many variables involved here that there is no intensely detailed conversion calculator that addresses all of them. The most important is the tax bracket differential between the conversion and later in retirement.

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