Over the last few decades we have seen an alarming number of people that are in financial difficulty drain or cash in their 401K or IRA. STOP!
Their theory is always the same: it is easy money to get a hold of and it will pull me out of debt. A year later they are in my office still in debt and with no retirement savings and often a tax issue.
Never cash these assets in before consulting with a bankruptcy attorney in your jurisdiction. Why? In most jurisdictions these assets are exempt in bankruptcy. This means you could have $300.000 in a 401K, and owe $120,000 in medical bills and credit cards, file your bankruptcy and eliminate your debt and keep your entire investment. This makes sense since some day you will retire and need the funds.
Too many people liquidate these investments and can never build them us again. We see many people liquidate and still can't pay all their debts so they lose the investment and are still hounded by creditors.
Taxes and Penalties: There is also a loss of some of your investment if you cash it out early. You end up paying taxes on the money and a heafty penalty for early withdrawl.
Bottom Line: Never Never Never cash these in for financial reasons until you have spoken with a competent bankruptcy attorney licensed in the state in which you reside.