| What do you do with the 401K. Since I'm not sure what the tax rate is in Va, nor am I sure Va follows Federal Law, I will only address the Federal side.
Since you are less than 59 1/2, if you cash in your 401K you will be subject to the 10% Penalty tax, unless you meet the following exceptions:
Exceptions to the Early Distribution Tax Penalties
You do not have to pay the additional 10% tax penalty on your early retirement distribution if you certain exceptions.
Exceptions for Early Distributions from an IRA:
You had a "direct rollover" to your new retirement account,
You received a lump-sum payment but rolled over the money to a qualified retirement account within 60 days,
You were permanently or totally disabled,
You were unemployed and paid for health insurance premiums,
You paid for college expenses for yourself or a dependent,
You bought a house*,
You paid for medical expenses exceeding 7.5% of your adjusted gross income**, or
The IRS levied your retirement account to pay off tax debts.
Exceptions for Early Distributions from a Qualified Retirement Plan such as a 401(k) or 403(b) plan:
Distributions upon the death or disability of the plan participant.
You were age 55 or over and you retired or left your job.
You received the distribution as part of "substantially equal payments" over your lifetime.
You paid for medical expenses exceeding 7.5% of your adjusted gross income.**
The distributions were required by a divorce decree or separation agreement ("qualified domestic relations court order"),
* The home-buying exception has the following additional criteria: you did not own a home in the previous two-years, and only $10,0000 of the retirement distribution qualifies to avoid the tax penalty.
** You do not need to itemize in order to claim the medical expense exception.
If the exception is properly coded in box 7 of your 1099-R form, you do not need to fill out Form 5329. If an exception applies and is not recorded in box 7, then you need to fill out Form 5329.
I know you would like to hear better answer as you are a "hardship case", but the Federal Income Tax laws are written by our Legislators we elect, not by I.R.S. Unfortunately, our Legislators don't take real "hardship cases" like yours into consideration when they make the law. After legislators have "hacked" everything up, and give the skeleton to I.R.S., I.R.S. is then given the monumental task of making the regulations from the bits and pieces they were given.
So if you contact your Congressmen, and Senators and tell them to make another exception to eliminate Early withdrawal penalties on Pension Plans based on "Economic Hardship" (and describe your case), maybe they can change the law.
Lest you think I am affiliated with I.R.S., I can assure you I am not. I live in a State that people that do Income Taxes have to be licensed, and have done Income Taxes for over 30 years.
Depending on what your combined income is for the year it may come out the only tax you owe is the penalty tax, and if you get earned income credit, you may still get a refund. I would suggest you let a good tax professional look at your past returns and what you currently have and see how the early distribution of the 401K plan will effect you. I can tell you this, once you take it out you will probably never be able to save up that amount again...remember pension plans are for your future not current indebtedness. | 
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