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Do you want to move all of it into IRA or you want to take a distribution?
If you are not 59 1/2 and you take a distribution, the distribution will be subject to income tax as well as 10% early distribution penalty, unless you qualify for one of the exceptions. There's no 20% penalty. Substantial equal periodical payments (Sepp) is one of the exceptions.
The SEPP can be used for both 401K or IRA.
To move the money from 401K into IRA you want to do direct trustee to trustee rollover. Do not take a distribution or you will have 20% withheld for taxes that you will have to replace with your own funds.
The avoid 20% tax withholding (again, it is not a penalty), you will need to do direct rollover. Open an IRA and contact your current 401K administrator to request the rollover form. You will need account number of your IRA. Your 401K funds will be directly sent to your IRA, not distributed to you.
There are several methods to calculate your SEPP, your IRA or 401K broker can give you the options. If you take a distribution before 59 1/2 you will have to pay regular income tax and 10% early distribution penalty. Usually 10 or 20% will be withheld to cover the tax liability.
Here are qualifying exemptions: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions
the 20% is just a withholding to cover your tax liability and is required by the IRS if the receiver is younger than 59 1/2 or qualify for any of the exceptions. It is not additional tax. You will get a credit for taxes withheld from distribution the same way you get a credit for taxes withheld from your W2.
Any questions? Where do you plan to open your IRA?
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The 20% is not a tax. It is a withholding. It is mandatory, if you take early distribution. You will get a credit for it when you file your tax return.
If you do rollover (from 401 into IRA directly), there will be no withholding. If you take a distribution (cash out some of it), 10 or 20% will be withheld for taxes.
A withholding is an estimated payment. You actual tax will be calculated on your tax return.
Some investment companies will ask you how much do you want to have withheld or if you qualify for any early distribution penalty exception, some will automatically withhold 20% on every early distribution (before 59 1/2): 10% for the penalty and 10% for the income tax. On a very large distribution that push you into a higher tax bracket, you can request 25%.
The main reason for the withholding to prepay your taxes so you do not have to pay underpayment penalty or end up with a huge tax bill when you file your taxes. On early distributions minimum 10% is mandatory. After 59 1/2 you can request no withholding.
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And if this answered your question, please take a moment to rate my response so that I may receive credit for assisting you today. You find the rating bar on the top of the page – 5 stars. However, if you need clarification, or want to discuss this issue further, let me know. Thank you.