For what it's worth, I am not a tax authority. I have looked into it, however, because I will be retiring shortly. If you roll your 401K directly to an IRA, there are no tax consequences until you take money out of the IRA. If at any time, the money from the 401K is given to you directly, you are liable for taxes. Therefore, you want your company to roll the money directly to the IRA.
If you want to take money out, you should probably roll it all to an IRA and then remove what you need. That way, you will only have to pay tax on what you take out. If at any time, you take money out of a 401K, or an IRA for that matter, and you are not 59 1/2 years old, you will be subject to a 10 percent penalty. The money will be taxed as regular income and the penalty will be in addition.
There are very real consequences to taking money out of a retirement vehicle. If you aren't sure, it would be a good idea to talk to a tax person. Hope this helps!
