Yeah, I think it's a 10% penalty plus you'll owe income taxes on it. I'd roll into an IRA (don't let that overwhelm you, it's easy to create an IRA account and just throw it into a target date fund).
I'd roll it over. I wouldn't want to pay the penalty and the taxes; plus you said you're not contributing the most to retirement and this shouldn't be taken away from it.
I'd say take it out and pay your credit cards so you're not paying interest. But that's only to be contrary (so not everyone is agreeing with roll it over) but not actually what I would do.
Not only would you be paying penalty and taxes, you'll be losing the future growth.
Ugh, this might be complicated. You're sure you're dealing with after-tax contributions? I thought that was relatively rare, especially for someone behind on retirement...
If so, is this what happened? You attempted to roll over a 401(k) to another 401(k) and then they rejected the after-tax portion of the rollover and are giving you the option to roll it into an IRA? Another question - do you have any other non-Roth IRAs (traditional, SEP, etc.)?
And you're sure it wasn't classified as Roth 401(k)?
After-tax-but-not-Roth contributions are a PITA because the IRS hasn't given clear rules. I think you can probably roll to a traditional IRA and then do a conversion to a Roth, which I would want to do b/c I would rather not keep after tax money in a traditional IRA (for a number of reasons, don't want to overwhelm you but I can elaborate if you want). Do you hire someone to do your taxes? That will help. You may also call the IRA custodian after the rollover for guidance. They may want/make you withhold 20% of the rollover for taxes, which would be a problem for you because you can't produce that cash with other funds. For now though, do the IRA rollover at least and then maybe you can deal with a conversion later. You need to be careful to report the rolled over amount as your IRA basis on Form 8606 when you file taxes.