If the 401k plan is still active, but you have left service with the employer, you are allowed to withdraw funds for any reason. However, if you keep the money for personal use, you will pay regular income tax (12%-22% or higher, depending on the amount and your other income) plus a 10% penalty for early withdrawal unless you are age 55 or older when you separated service.
You can rollover the money to a qualified retirement plan at your new employer (if they will accept the funds) or into an IRA that you can open at any bank or broker. You want to do this by direct transfer from plan to plan. If you do it by getting a check (or electronic funds transfer to your own bank), then you have two issues to deal with:
1. You must complete the rollover within 60 days or the entire amount becomes taxable and ineligible to rollover to any retirement plan tax-free.
2. If you get the money, the plan is required to withhold 20%, but to complete the rollover, you must deposit the entire gross amount in the new account. Suppose your balance is $50,000. IF you get the money, the plan must withhold 20% or $10,000. But you must deposit $50,000 in the new IRA. If you only deposit the $40,000 net amount, the $10,000 will count as a withdrawal and will be subject to tax and penalties. To avoid tax and keep all the funds in a tax-free retirement account, you must find someplace else to come up with the difference. You will get the withholding back when you file your tax return.
Lastly, any withholding on your withdrawal is only the mandatory minimum, and is not the entire amount you will owe. You must report the withdrawal on your tax return and your actual tax will be calculated on your tax return with all your other income, deductions and credits, and you will probably owe additional tax when you file.
If the plan is active, you may also have the option of leaving the funds to grow tax-free with the plan where they are now, even though the employer closed.
If the 401k plan is also closing, you have the same basic options (tax free rollover, or keep the money and pay tax) but the plan may also be required to open an IRA for you with the funds if you don't make a choice within a specified time frame.
