Your 401(k) plan distribution is likely to be one of the largest sums of money you will ever receive, depending on how many years you participated in the plan. When you take the money out of your plan, there are tax consequences. Before you begin thinking about making a total withdrawal, you should consider the taxes you might have to pay on that money, and ways you can postpone them (if that is your goal).

When you receive a distribution from a 401(k) plan, it will be subject to ordinary income tax, unless the distribution is rolled over to a traditional IRA or another employer retirement plan, such as another 401(k) plan at your new employer. Your distribution is generally subject to 20% federal income tax withholding, unless the distribution is directly rolled over to a traditional IRA or another retirement plan.

This withholding applies to your pre-tax contributions, any employer matching contributions, and their earnings, as well as the earnings on your after-tax contributions, if available under your plan. The 20% withholding rule does not apply to any after-tax contributions you may have made, because you have already paid income tax on that money.

When you take a loan from the 401(k) plan, the amount of the loan is not subject to the 20% withholding requirements, because it is not considered a withdrawal. But be careful with loans when you leave your employer. If you leave the company before repaying the loan, or without making arrangements to repay the loan (if permitted), any unpaid loan balance will be considered a distribution and will be taxable. You may also be liable for the additional 10% early withdrawal penalty tax. So, be sure you pay off the loan before you leave, or, if permitted, arrange to make payments.