With the coming of the new rules since January, 2010, everyone of us who has an IRA account will now be able to convert it into a Roth IRA. This has created an opportunity for all of us to have a tax-free growth of our retirement investment dollars. However, you should remember that while you convert a traditional IRA to a Roth IRA, it will be considered as a taxable event. Thus you'll owe taxes on the money that you convert excepting the nondeductible contributions made to the traditional IRA account.
Let's take a look at some of the ways in which you would be able to pay for the taxes resulting from the IRA conversion:
Use the proceeds from life insurance - This is an option which would work mainly for those who want to leave their IRA money to their beneficiaries and not use it for their own retirement. After the death of the IRA owner, the heirs can convert the IRA account to a Roth IRA and use the life insurance to pay for the taxes.
Use your liquid assets - In order to pay the taxes for the conversion of your IRA account to a Roth IRA, you can use your liquid assets. You can use your cash savings which you've accumulated in your savings account or CD. Apart from this, you can also sell the securities held in a brokerage account, if any, to pay the taxes for the Roth IRA conversion.
Pay taxes with the IRA's assets - You can also use the assets from the IRA to pay for the conversion taxes. However, this should be your last option. You should note that if you deduct large amount from your IRA, it will in turn affect the growth of that account. Financial experts always suggest to avoid such a transaction as it would take years for you to replace those funds. Also, if you're below 59 and ½ years of age, then you will have to pay 10% of your money as a penalty for an early withdrawal from the IRA account.