- You are not subject to the 10% penalty if all the funds are properly rolled over to an IRA of some type.
- I think you will need to come up with the taxes from your non-retirement funds, otherwise a 10% penalty will apply to any retirement funds used for this purpose.
- Make sure you understand how under withholding can cause IRS penalties. Quarterly tax payments is a related concept, although you might to check to see if you can increase your job's W2 withholding all year to cover the increased taxes due to any Roth conversions.
- Remember you don't need to roll over the entire $37k at one time. My advice would only to do maybe $1k the first year so that you understand the process (including filing your income tax the next year).
- You also may wish to do smaller rollovers over multiple years to avoid be pushed into a higher tax bracket if this is an issue.
- How long until you can RE? Once I was within 5 years of retirement, I held off on any taxable Roth conversions because of the lower tax rate (15%) that would apply in retirement due to lower income.
FWIW, both DW and my 401k plans also had the availability to make after-tax contributions like @Shawn describes. Since 2010 we were each maxing out the full IRS limit (~$100,000k combined). This built up our Roth IRAs nicely over the course of a few years without having to convert any of our pre-tax money. You do need to watch out for and manage the Pro-Rata rules, however.
If anyone has access to after-tax contributions in their 401k combined with the ability to do in-service withdrawals, this can be a huge benefit.