Nope, it's not really a good idea. In addition to the 10% penalty you'll pay if you're under age 59.5 those funds will increase your tax liability for the year they are withdrawn and also have state tax liability as well. Depending on your other income levels, you could loose 40-50% of the value to taxes. Never touch your retirement funds if you can at all avoid it.

You'd do better to stop contributing to your 401k, even if you were losing a small company match, in the short term and simply use that money to help pay down your debts.

Have you considered refinancing your house to pay off any high interest credit cards? At least then the lower interest you'd be paying would be deductible. This only would be a plausible option if you think you have the ability and discipline to not then accumulate more debt after the cards are paid off. Frequently, people will simply rack their card balances right back up.

Then there's always simply taking a second part time job, and dedicating that income to paying down your debt. $32,000 for the cards and car is not an insurmountable amount to pay off in a few years time if you get your living expenses under control and make an effort to increase your current income.

Wouldn't it be a wash if we did not build up any new credit card or auto debt over the next 5 years because of the credit card interest rates?

That would depend on the interest rates your paying, and how well your 401k is performing. You have that lost opportunity on future earnings as well as the tax hit.

I'm a big fan of going into voluntary poverty to pay off your debts by cutting off the cell phones, cable, eliminating gifts and entertainment and living like your broke, because if you have accumulated that much debt, you rather are broke and will continue to be until you adjust spending habits/lifestyle. Very few people are going to change their lifestyle and spending habits by simply paying it all off in one fell swoop while paying a premium to do so.

Then there's the issue of if your employer will allow you to withdraw. You'll want to check your plan documents. If you are still with your employer, they don't have to even allow even hardship withdrawals at all. Paying off a credit card wouldn't qualify as a hardship. Some will consider loans against your balance and this would avoid the tax hit, but you'd still have the payments on the loans deducted from your pay, which i take you are looking to eliminate the payments at this time?

Because of increased stress, my wife has chosen to leave her job, so this option may be one of necessity. The 401k is through her old employer, so at this time, we only have the one income. I don't like the idea of pulling money out of the 401k either, but we need to reduce all possible expenses and doing so when we are at one income seems to be a better time than if we were both working as I don't believe the tax hit would be as hard. We are also hoping that after we pay off the credit cards and refinance the mortgage, that we would be able to put some of the money back into a 401k or IRA to minimize the tax hit.

You only have six weeks to rollover into a new IRA or 401k, and that includes the amount withheld for taxes. So if you're taking out 50k, you'll receive 40k as they will withhold 20%, or 10k for federal taxes in this example. If you have 32k in debt you intend to pay, that only leaves you with 8k to roll over or more likely, to set aside towards your anticipated tax bill at the end of the year.

Be sure to think ahead and estimate what your income plus that 50k will result in for a tax bill, because the amount withheld may not be enough to cover the penalty, federal income tax and any state income tax you may have to pay when you file your taxes. You don't want to be stuck owing the IRS.

We are also a one income family now. It can be challenging to adjust your lifestyle, but it can be done. I do earn from home, but not the equivalent of my former profession. However, I didn't start staying home until we were debt free. You're right on that count, it's easier to manage on one income when you aren't awash in debt. Any chance your wife would consider working for a year at a new employer just until you have your debts paid down, then stay home?

Actually IMHO, you have 60 days from termination from a qualified plan to "roll" the funds into another qualified account. As for the original question, it only makes sense if its in dire need to access the funds. If you can stop contributing to the 401k for a short period of time to pay down your liabilities it is much wiser. Once you take the funds from the qualified source, you can not reclaim them as qualified down the road (put the 50k back into a 401k or IRA) all at once due to contribution limits. IMHO is correct in saying that the funds would be taxable as ordinary income in the year received minus a 10% penalty for early withdrawal.