The money is coming from a former employer that has it in a defined benefit plan, which of course has not been taxed. I was out of work for 1 1/2yrs and took a substantial pay-cut. i earn less than 27k a year. So taking my tax bracket into consideration, which is the better option. Take as cash or rollover into IRA. My goal is the same. I want to put the money into a ROTH IRA, but I don't know that I have the money aside from those funds to pay the taxes on it. But I do wnat to do whatever is going to be cheaper in the long-run.
If you take the money as a direct cash distribution you'll be taxed and penalized (assuming you're under age 59.5). You could rollover the funds into a traditional IRA and pay no tax, as this rollover would be a tax-free event.
In order to get the money into a Roth IRA account, you could convert the funds directly from the 401(k) plan, paying tax on your tax return for the year that you convert. Depending upon your cash-flow situation, this might cause problems - you mention that you might not have a source to pay the taxes other than the funds from the 401(k).
Maybe a better option would be to rollover the funds to a traditional IRA (no tax so far), and then depending on how much money is to be converted to Roth, you could stage a multi-year Roth conversion, paying the tax by increasing your regular withholding from your job. It can be a little complicated to get this right, but doing it this way might be the lowest cost and lowest impact (from a cash-flow perspective) for your situation.
Hope this helps -
Matthew, excellent question. It is clear you are considering the correct aspects of this puzzle. I agree with Mr. Blankenship's answer. This strategy will buy you some time for better fact finding, which is really what you need.
In order to discover the real tax benefit of the Roth Conversion for you (and today's tax cost to you, as well), you really should do a tax projection. This means actually running your 2012 tax return right now. You would input everything you know about your income, deductions, etc., that are "real" so far this year. Then, you would make the best guesses you can about how the rest of the year will play out.
Just knowing your marginal tax bracket is often misleading. There are too many moving pieces inside your tax return. Quite often the tax brackets are lying to you. I strongly recommend you run a tax projection and make your Roth Conversion decision(s) on the basis of that analysis.
Remember, doing a Roth Conversion means you are voluntarily agreeing to pay your taxes early. The only reason you would ever do this is if your taxes now are lower than you expect them to be in the future. If that is not the case, the Roth Conversion may not be a great idea (again depending on your tax projection.)