Tax Penalties

• If you cash your IRA in before the age of 59 1/2, you could be subject to a hefty 10 percent tax penalty on the amount you withdraw. In addition to that tax penalty, you must pay ordinary income taxes on the money you pull from your IRA. If you are in the 35 percent tax bracket, that could mean that nearly half of the money in your IRA would be sacrificed to taxes and penalties.
  
  

Long-Term Retirement Security

• One of the biggest disadvantages of taking money out of your IRA is that it can put your long-term retirement security at risk. Spending the money you have worked so many years to accumulate can set your retirement planning back for many years and make it that much more difficult to save for the day when you stop working. If you have other options at your disposal, you should exhaust all those options before cashing in your IRA.
  
  

More Expensive Options

• It can make sense to liquidate some, or even all, of your IRA if the other options at your disposal are all more expensive. If you are unable to qualify for a loan with a low interest rate and your only choice is a high interest rate payday loan or running up your credit card, pulling money from your IRA could be a much better option. Even so, you should exhaust all your other options before turning to your IRA as a source of cash.
  
  

401k Loan

• If you need money and are considering cashing out your IRA, it might make more sense to take out a loan against your 401k balance. While a 401k loan should also be a last resort, it does allow you to escape the tax penalties that apply if you cash out your IRA before age 59 1/2. Many employers allow their workers to borrow from their 401k plans, with the money they repay going back into their accounts.