The law lets you delay paying taxes by allowing your 401(k) plan money to be rolled over into another company's retirement plan, e.g., a 401(k) plan, if you are still working. A rollover must generally be completed within 60 days of when the distribution was received. It is usually wise to roll over your distribution because you are deferring taxes on your former 401(k) contributions and you continue to delay paying taxes on the amount it earns as well.
Direct Rollover to a Traditional IRA or Other Retirement Plan Avoids the 20% Withholding Tax
If you roll over your 401(k) distribution directly to a traditional IRA or other retirement plan, you pay no taxes on the money at that time, and you are not subject to the 20% withholding requirement. This can be accomplished by completing the appropriate plan documentation and establishing a qualified IRA account. You never touch the money or get involved with the transfer. This is called a "direct rollover."
