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As for the finances question:
-If you can afford the entirety of his contract in your budget room at the time you release him, then you are given the option to pay his entire future salary immediately.
-If you cannot afford him, then when you release him his salary will get spread over the remaining seasons.
If you can afford it, releasing him BEFORE getting your new budget essentially means that if your owner was going to take that cash, then it will instead go towards paying him, which generally speaking will be better for you. But if you can't afford it all (which is what it sounds like is happening in your case), then it won't make a difference.
As for what you should do, I would recommend as the above guys say. While he's certainly way overpaid, he's not really a net negative overall - that .390 BABIP he's running this year will improve, and he looks like he still should be a 6 inning per start/4 ERA sort of player. So he should be fine as a #4-5 guy, or if you have other guys you want to start instead, should be decent enough out of the bullpen. His expectation is bullpen, so moving him there might even improve his morale if his season performance picks up a little bit.
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