If you can pay off the outstanding loan, the roll it over to a Traditional IRA which will be no tax, and then if you have to have any money, take it out.
I don't see anyway around the 10% penalty for taking it out early.
You don't say how much is in the retirement account, but if substantial and you have to have the money to live on, then try to take it out over a couple different years to minimize the income taxes on it.
