Transferring 401k to IRA

If you "roll" a 401k into an IRA, it is a non-taxable non-penalized event.

If you then take the money out of the IRA, you will pay a 10% penalty plus income tax.

The 401k and the IRA are "qualified" retirement accounts. As long as the money stays in such, you're good.

I was told, could have been bad information, that if I cashed it out of an IRA, I could defer the tax until the following year so 2018. If it doesn't allow that then wouldn't I just cash out the 401k and move on? I'm trying to avoid the immediate tax and just pay the penalty. Obviously the tax will come due, just hoping to defer a year. Thanks

Thank you. So I can do this with either a 401k or IRA? I was only going to transfer it to an IRA as I was told I could defer the tax when cashing in the 401k. Again, could be bad information.

I thought I specified in my original post that it was from her old job. She is working for a new company as a contractor and doesn't have a 401k setup with them. We would like to take this small 401k and use it for a real estate investment. In order to avoid the taxes, for now, I was told to transfer it to an IRA as they would just hit me with the 10% penalty and I could defer the taxes. I was asking if this was true. Either I can just pay the penalty when cashing out the 401k and defer taxes until 2018, or I cant defer the taxes and maybe a transfer to an IRA would work. My goal is to pay just the 10% penalty and defer taxes to 2018. If this can be done via the 401k then great, if not, then can I transfer it to an IRA and then do the above.

No worries, thank you for the input everyone.

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I believe once you leave a job ,that job's 401k can be rolled all into a rollover IRA, with no penalties and be done at any time.
Further, if you leave your old 401k open for too long, the old company may want to close your account and if you didn't rollover then to a qualifying IRA, they would send you a check with the 10% penalty taken out.

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I just did this. I left my job, the 401k was automatically rolled into a traditional ira. My options were to keep it there, cash out and pay 10% penalty plus taxes, or roll again into my Roth where there's no penalty, but I do pay the taxes.

The taxes can either be paid immediately (which the guy says nobody does) or they send you a tax form in early 2018.

I rolled it into my Roth.