To withdraw from a 401(k) plan after termination, an individual fills out the required distribution forms provided by the former employer, reports the Motley Fool. Termination from employment is not one of the exemptions from the 10 percent penalty the IRS imposes on early distributions.
The former employer sends a Form 1099-R at the end of the year, which states the amount of the distribution and the amount withheld for federal tax, states the Motley Fool. An individual who is younger than 59 1/2 uses this information to fill out Form 5329 to determine the 10 percent penalty. If another exemption applies, such as disability or leaving work at the age of 55, he documents it on this form. He can then record the information from these forms on his tax return to calculate his total tax liability.
If a person is not suffering financial hardship, he can avoid a penalty by rolling his 401(k) into another qualified retirement, such as an IRA, according to The Nest. This allows him to defer paying taxes until he takes a distribution and avoid paying the penalty. Money from a 401(k) must be deposited into the new plan within 60 days of withdrawal.