In case another newb has a similar issue and finds this later on down the road I will relate how I fixed this...
Got the nerve to take the windlass apart today. Useless somewhat until fixed so whats the worst that can happen? Not horribly complicated as I imagined. Someone was looking down from above as he/she/it saved me three times on close calls with pieces going overboard. Cleaned everything up, wiped away excess spray lube and wet/dry papered some gunk off the spacers and cones. I've been emailing the guy who has the spare parts in England, "SL Spares". Nice gentleman who told me that everything on the shaft, besides the main gear, should slide easily. He thought it was bad bearings. Checked the bearings and they seemed fine. Not seized, rolled nicely. The only thing I had a problem with sliding nicely was the spacer that goes between the drum and the main body. Had issues every time I tried to take the drum off. Thought about what he said and looked closer at this spacer. The hole where the shaft slides through was gunked up pretty good. Some 220 wet/dry to clean it up, now slides nicely. I reassembled and voila, working like it should on both freewheel and retrieving. I think what was happening is when I used the clutch to tighten the cones that spacer was jamming on the shaft due to the corrosion/gunk and preventing them from tightening on the gypsy. Anyway, problem solved and a nice little education on my windlass.