The government is strongly opposed to you cashing out your retirement money so they have put on harsh penalties. Imagine flushing some $4000 down the toilet! This is never a good idea. You have also killed the momentum of your 401K account.

Living rent free with close to zero expense, you need to be saving like mad, paying off the credit card, and planning a strategy, not planning to buy the next shiny thing that catches your eye. Maintain a low cost of living, work a second job, get some cash in the bank.

401k plans are ok but I hope that a 401k plan is not what you will rely on during retirement. I never advice anyone to put more into a 401k plan then the company match.

Since you have very little living expenses I suggest that you look into an investment plan for the future. You are very young and have plenty of time.

Define your investment goals so you know what to look for. I would not cash out your current 401k to pay off debt. If you really want to cash it out use that money to buy assets which will create positive cash-flow for you and use that to pay off debts.

I agree with Dru. However, you do have to consider all the possibilities. For example, if you are paying 27+% in credit card interest, it makes no sense, even with the penalty, to having that 401k money sit there. Even if $5k of that money earns 27% over the next year, you'd just be breaking even!!!

But there is a reason why I would advise against cashing out the 401k, and it has nothing to do with the economics of the decision. You said it yourself, that you've had problems managing money in the past and you are working towards making positive changes. Paying off the credit card with part of your 401k balance might make things worse, because now you'll have a credit card with available spending limit and will probably fall back into the same problem again. Closing the credit card would be the absolute worst thing you could do, even though it would remove the temptation.

So I would suggest what Dru said which is to leave the 401k alone, as it will have the power of time to grow. If you do anything, roll the 401k over into an IRA to get out from under the old plan's 401k rules and into federal IRA guidelines. Also, you'll have more control over the investments.

If you don't feel confident in the financial guidance you are getting or just unsure of yourself, consult with a fee-based financal planner that can help you develop a budget, goals, and investment planning.

Lastly, make sure you pay all of your expenses each month and then redirect as much extra cashflow as you can towards paying off the credit cards. If the student loans are currently accruing deferred interest, then I'd pay a little extra on them if you could as well. Take advantage of this time to get on top of things because your expenses will only go up in the future.

Thank you all for your advice. This is what I needed-- someone to tell me like it is by laying it all out on the table. I wasn't seeing the forest for the trees. Thank you all again!

One thing I want to add here:

If you really want to succeed you need to pay yourself first before paying everyone else. That is my opinion and I can imagine the vast disagrrement with that statement.

I always advice to invest your way out of the problem rather then pay your way out of the problem. It may be harder but the benefits are also greater. I know several individuals that tackeled their debt with this approach and were very happy they did so. After their debt was paid off they were in a much stronger financial position then if they would have paid their way out of it.

It's one option worth considering, at least in my opinion.

Investing your way out of the problem works only if certain conditions are met:

1. After-tax investment returns must be realistically and consistently able to outperform the interest being accrued. Every dollar you use to pay off a credit card with a 20% interest rate is a 20% return on that dollar in unaccrued interest. In order to put your money elsewhere you'd have to earn more after-tax than the guaranteed savings in interest.
2. You must have enough of balance of cash to invest in order to make the returns great enough to accomplish it. For example, if you are earning 20% returns on $100/month savings, your compounding returns are not great enough to keep up with the rising $5000 balance that is growing at 20% interest ($1000 per year). Without sufficient balance/savings, you are a dog chasing a car.
3. Most important, your investment returns must be both consistent and realistic, without considerable risk. Whatever your credit card interest rate is, think of that as your guaranteed bond rate. If you could earn rates above that, that is fine, but consider the risks involved. If you invest your money and it goes south, you could be stuck with a compounding credit card balance AND no money.
4. Make sure you consider the tax implications of some investment strategies, which will eat away at your returns.

Personally, I can see value of investing your way out of situations, but it is rare for most people. Those that accomplish it typically have extraordinary knowledge in investing, are typically risk-takers, and the experience of having done it before. For most people, I think you are gambling when realistically, sound advice and discipline will do just fine.

I agree that you need to either have an extreme knowledge of the market and a strategy that can consistenly deliver returns or have the advice on how to accomplish that.

Many people run to debt consolidtation companies and companies which help them to handle their debt load. For those people who need and want help with their debt instead of asking for help on how to pay their way out they may want to consider an option which allows them to invest their way out.

Most people will not choose that option but I just wanted to put it on the table. It is easier to pay your way out but it is not that hard to invest your way out of debt as most people may think.

I think sound advice and especially discipline is important regardless which option the individual chooses.