This is just me (I am really often overly conservative on my finances) but I would definitely set aside the money as cash. Lots of folks will give good arguments to keep it in the market. But I would not want a market correction to suddenly make my 1 year off into a panic to find work. Again: that's just me. We are FIRE... we keep quite a bit in cash for these reasons. And if the market DID slide... we'd probably use it to buy as it went down.
I took about 3 years off right around the 2006-2009 time frame. The good news here was: I had ready money for living when the market tanked in 2008. The bad news was: I didn't have enough ready money to invest it as it slid. And I didn't have income other than dividends. At the time, that was not enough to live on.
The idea to convert tIRA -> Roth seems like a good one. If you're not earning anything, you'll likely not owe anything in taxes. Standard deduction is ($6300/single; $12,600 married). Exemptions for 2016 are $4050 per person. So if you're single you can earn (through dividends or tIRA conversions) $10,350 without owing any tax. ($20,700 for married).
Health care probably means pay your way with ACA. The subsidies can sometimes be tricky to get approval for. You WILL get them... but you may get them as a tax refund the following year. They want to see an IRS tax return from a previous year that substantiates your claim. Since you will have worked the year before, it can be hard to get that through their heads. You may have to just pay up front and take your subsidy on the following year with a refund. So... you might want to add that to your $40k with the idea "you'll get it back later."