Federal income tax must be withheld from the taxable portion of all plan benefits you or your beneficiary receives, unless you or your beneficiary elect otherwise.
Under current federal law, ordinary income tax applies to payments to you from your plan accounts (not including payments considered to be a return of after-tax contributions you have made — these are recovered without additional income tax under specific rules for determining the after-tax portion of each payment).
In addition, a 10% penalty tax applies to all payments you receive before you reach age 59½, except certain payments in the form of an annuity. The 10% penalty tax does not apply if payments are received because of your death, disability, or early retirement at age 55 or older; or in connection with a Qualified Domestic Relations Order; or in amounts that do not exceed your tax-deductible medical expenses, or certain amounts spent for health insurance in the event of your extended unemployment.
You may be able to postpone payment of taxes if you are able to roll over your plan distribution to an IRA or another plan that accepts rollovers. Any contributions in the plan may be transferred to an IRA or another 403(b) arrangement or qualified plan that accepts such contributions in order to continue earning tax-deferred interest or investment gains.
All cash distributions from the plan, except those payable as an annuity or in periodic installments for at least 10 years, those payable to non-spouse beneficiaries, and those mandated by minimum distribution rules, will be eligible for direct transfer to an IRA or another plan that will accept them. If these distributions are not directly transferred to an IRA (or to another employer plan that will accept them), they will be subject to mandatory 20% federal income tax withholding.