You can though postpone any income tax on this withdrawal by completing a 401k rollover to a traditional IRA. It must be a traditional IRA and not a Roth IRA. A rollover is really just a movement of assets from an old retirement plan into a new retirement plan.
If your 401k assets consist of appreciated company stock of your employer, you have what is known as Net Unrealized Appreciation (NUA)
If you withdraw cash or other assets such as stock from a 401K  plan (known as a 401k cash out), a taxable event generally has occurred. This is because your 401k salary deferrals throughout the years were not subject to income tax.

How a 401k Rollover To an IRA Will Save IRS Taxes and Penalties

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Helping you to save your retirement.

A 401k Rollover Will Protect Your 401k Retirement Assets

When you retire or when you leave a job and you don't want to leave your 401k assets in your former employer's  plan, you basically have three options:

■ You may setup an IRA account to which you can rollover your 401k assets. Generally, most 401k rollovers are made to an IRA. Learn about investing your IRA.

■ You may be able to make a rollover to your new employer's retirement plan, which could be another 401k plan, profit sharing plan, etc.

■ You may elect to receive your 401k assets without making a rollover. This is known as a "cash-out" of your 401k. Your employer is required to withhold 20% of the amount of your 401k withdrawal for Federal Income Taxes. The bad part of a cash-out is that you will have to pay income taxes on the entire taxable portion of the 401k distribution.  You additionally may be subject to an IRS 10% penalty, if you are under the age of 59½  at the time of the distribution.
If you choose to do a 401k rollover, you can have the assets directly transferred to your new traditional IRA or retirement plan. In this way, you never receive or take control of the assets. The IRS does not require any income tax to be withheld on a direct rollover. 
That is a gigantic mistake that you don't want to make.  The total tax bill will depend upon your other income and your tax bracket.

The combined income taxes and the 10% penalty can easily be 32% and as much as 47% of your 401k withdrawal.

So, if your 401k cash out was $200,000 and the tax and penalty was 47%, you would be paying $94,000 to Uncle Sam.

That's a big chunk out of your retirement cash and it is gone forever. Plus, since you only had 20% withheld or $40,000, you will have to pay an additional $54,000 to the IRS when you file your tax return.
The general consensus lately has been to refer to all retirement plans as either a 401k plan or an Individual Retirement Account (IRA).  Though in recent years the 401k salary deferral plan has become the most popular employee retirement plan, there are other types of plans.  These plans include:

Profit Sharing plans

Defined Contribution plans 

Small Business 401k Plan - Profit Sharing Plan

■  Defined Benefit plans

Simplified Employee Pension plans (SEP)

Money Purchase plans

■  403(b) Tax Sheltered Annuity plans (TSA)

■  Various combinations of these plans
Even though the information on this web site will provide you with valuable information about 401K plans, IRA plans, and other retirement plans, the information is general in nature and not intended to be personal advice.

The information on this web site is not offerred as legal, investment or tax advice. These plans and the  rollover process can be complicated. 

The IRS allows you to make this tax-free transfer into another employer qualified retirement plan or into your  Individual Retirement Account (IRA).

The IRS has instituted very important and very exact rules as to how this transaction must take place. It is imperative that you understand these rules and your options. There are potential severe income tax pitfalls if you don't understand the rollover rules and fail to correctly follow them.

You could unintentionally lose a large portion of your retirement nest egg to income taxes and penalties.  Please see the below example of how you can lose a large chunk of your 401k to income taxes and penalties.
However, if the assets are distributed to you, the IRS requires that 20% will be generally withheld for income taxes. You then will have 60 days in which to rollover the distribution.

You must rollover 100% of the distribution and not just the 80% you received after the income tax withholding. In other words, you'll have to come up with the other 20% from other funds.
401k Taxes and Penalties
401k Rollovers
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401K Withdrawal Options
You can be put into this rollover decision if you leave your job through retirement or any other termination of employment.  You sometimes have the option of leaving your retirement assets in your former employer's retirement plan.
IRA Investments
Things you must consider before you invest your retirement money.... read more »

Learn how a Simplified Employee Pension plan works for  your small business and your employees.

Profit Sharing & Money Purchase Plans  
The yearly contribution can be variable or a fixed percentage.

403b-TSA Plans
Tax Sheltered Annuity plans for teachers  and non-profit organizations.

Small Business 401k
You can have a 401k for your small business even if you are self-employed or a sole owner.

Defined Benefit Plans  
This can be perfect for a high income sole owner business -- very large tax deductions. 

401k Deferral Limits
How much can I contribute to my 401k?

IRA Limits   
How much can I put into my IRA and how much can I deduct on my tax return?

Roth IRA
How does a Roth IRA work and what are the income limits for my yearly contribution?

Generally, for tax puposes it is better to rollover this stock into an IRA or other retirement plan. Net Unrealized Appreciation is very complex and there can be circumstances where it may be better to currently pay income taxes on the taxable cost portion of the stock. 

You should definitely receive competent tax and investment advice for NUA issues -- it is in your best interest.
In most cases, it makes more sense to not leave it in your old retirement plan.

Instead, you could use a rollover to transfer it either to your new employer's retirement plan or to your traditional IRA.

It is better for you to have as much control as possible over your retirement assets.  Therefore, rolling your 401k into a traditional IRA is a better choice.

CD's & Bank Accounts
Do the ups and downs of the stock market give you a bad feeling? .... read more »

IRA Mutual Funds
Choosing mutual funds is not easy .... read more »

Self-Directed IRA
More investment choices including real estate.

IRS Rules For Self-Directed IRAs
They are complicated but important.

Checkbook IRA LLC
Learn if you need a Checkbook LLC for your self-directed IRA.

Some people wrongly assume that the 20% tax withheld is the entire amount that they will owe Uncle Sam; and that they will not have to pay any more taxes when they file their income tax return.
And, if you cannot put together the missing 20%, you could be in jepoardy for a big tax and penalty hit. That's why it is usually better to make a direct rollover to avoid the 20% withholding requirement.