You can avoid the mandatory 20% tax withholding by doing a direct rollover to a traditional IRA, then taking a distribution from the traditional IRA and instructing the IRA custodian not to withhold any taxes; direct rollovers from an employer plan are exempt from the mandatory tax withholding. However, you'll still be subject to taxation of the distribution and your income tax liability for the year will be the same either way.
Be aware that underpaying taxes for any of the tax quarters of the year could subject you to an underpayment penalty, so unless you are covering the tax liability with estimated tax payments or tax withholding from other sources, you still might want to have taxes withheld. In fact, depending on your other taxable income, 20% tax withholding might not be enough.
What you use the money for has no bearing on the taxability of the distribution.
The 20% is probably just the withholding amount. The actual tax will be based on your total income.
You have taxes withheld like from you paycheck. You enter the whole gross amount (before taxes were withheld) with your other income to figure out the total tax (and it may put you into a higher tax bracket) and then the withholding is subtracted from the total tax to figure your refund or tax due. The Gross amount shows up on 1040 line 4a or 5a and the taxable amount on 4b/5b. The withholding will show up on 1040 line 25b.
You can avoid the mandatory 20% tax withholding by doing a direct rollover to a traditional IRA, then taking a distribution from the traditional IRA and instructing the IRA custodian not to withhold any taxes; direct rollovers from an employer plan are exempt from the mandatory tax withholding. However, you'll still be subject to taxation of the distribution and your income tax liability for the year will be the same either way.
Be aware that underpaying taxes for any of the tax quarters of the year could subject you to an underpayment penalty, so unless you are covering the tax liability with estimated tax payments or tax withholding from other sources, you still might want to have taxes withheld. In fact, depending on your other taxable income, 20% tax withholding might not be enough.
What you use the money for has no bearing on the taxability of the distribution.
Any money you withdraw from a deferred compensation plan will always be taxable income, no matter what you do with the money later. Even if you find a trick to avoid the standard withholding at the time of withdrawal, you will still owe the tax on your tax return at the end of the year, and you might also owe a penalty if you didn't pay at the time of the withdrawal.