We've received a lot of e-mails this year asking us to explain distributions from 401k or other employer sponsored plans such as 403b plans.  This is important!  Make sure and understand your options.

If you are no longer active and have left the employer-any request for a distribution will require the plan to withhold taxes.  If a check is made to you, 20% of the distribution will be withheld for income taxes.  This is different from an IRA account.  Distributions from IRA accounts have a mandatory 10% withholding and give you the option to withhold a higher amount or have no taxes withheld.   Most plans will suggest you initiate a direct rollover into an IRA and then do a distribution from the IRA if you need the money.  Naturally if you take money from an IRA prior to 59 1/2 you may be subject to a10% penalty.

401khelpcenter.com provides more detailed information and the exceptions to the 20% rule.