It would be a REALLY BAD IDEA use the money that's in the account to pay the taxes. You will never be able to replace that money and it could cost you about $10k (state and fed) which would be a LOT more in 30-40 years. I am also not sure whether, if you use it instead of rolling it, you will have to pay penalties on that money. If you can't afford to pay the taxes now, either don't convert it now or, roll it to a rollover IRA and convert it a little at a time. If you do $10k/year you can adjust your paycheck withholdings to cover the $3k or so that you'd have to pay in taxes so it's spread out and you don't even hardly feel it.
I don't know the tax brackets but if you make $62 and a new tax bracket starts at $63, then yes you will be put into a new bracket and this entire amount will be taxed at a higher rate. However if that was a typo and you are already within that bracket then you're fine.
Regarding 2008, the only thing that is changing is that you can roll from a 401k DIRECTLY to a Roth. Currently, you have to roll to a rollover and then convert to a Roth. In 2008 that middle step goes away. Other than that it doesn't impact your current situation.
Man, I suck at math. Yes you're right on the tax bracket thing. If I'm that close to the next level, pulling funds out of the 401k would push me up. Duh!
And I think I follow you on the not using the 401k funds to pay the tax hit in converting to Roth. You're basically saying it's better to pay my taxes out of pocket so I can keep more cash invested in the Roth or 401k. And it looks like waiting till 08 is a good idea so I can skip the rollover IRA step and just go straight to Roth. Of course all of this is predicated on the whole question of if I'll even be allowed to do this inservice.
And Dylan, you're basically saying that in 08 I could roll to Roth, but still be limited to a $5k contribution, right? (2008 Roth limits are $5k I believe.) And in 2010 I could theoretically put the whole 401k funds into a Roth without worrying about a contribution limit. Am I on the right track here or has my math train left the rails and blown up?