10 Reasons Why People Cash Out IRAs Early

To Avoid Bankruptcy
Not only people go bankrupt; businesses do too. Hostess Brands, which made iconic baked goods like Twinkies, shut down operations in late 2012 and filed for bankruptcy. Scott Olson/Getty Images

The Great Recession of 2007 to 2009 struck a crushing blow to many Americans' finances. People who face insurmountable financial problems are often advised to think about filing bankruptcy. Considered a last resort, bankruptcy makes a mess of a person's credit rating, and depending on the type of bankruptcy filed, all of the person's assets may be sold to pay the debt. From 2009 to 2010, bankruptcy terminations rose 110 percent in Nevada, 57.7 percent in central California and 43.2 percent in South Florida [source: U.S. Courts].

You might be tempted to do anything to avoid bankruptcy, including cashing in your IRA. But there's good news! Thanks to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, up to $1 million of IRA assets are protected from creditors during a bankruptcy [source: Greene]. Even better, if you roll over 401(k) assets into an IRA, 100 percent of that money is immune from bankruptcy, even if it's more than $1 million [source: TIAA-CREF].