Q: My workplace has been sold and I am being terminated. If I take a lump-sum distribution of all or part of my 401(k) plan, will I have to pay state tax in addition to the 20 percent federal withholding? I am 56 years old and have more than five years in the plan.

A. There's bad news, good news and a recommendation from experts responding to your query.

A 401(k) is a retirement savings plan funded by earnings before tax. The catch is that the income from your 401(k) is taxed once you start drawing it.

So, yes, you will face a state tax levy should you take a partial or lump-sum withdrawal. But it's not as simple as withdrawing the money and paying the income tax that's owed on it.

Les Andrews, a financial planner specializing in 401(k)s, said Hawai'i tax laws are such that you need to check whether you have a plan funded solely with your own contributions, or have one where the employer has contributions also.

You'll need to look at your plan statement to determine the source of the assets. Money from your own contributions and growth thereon is taxed, while funds from your employer and gains thereon aren't, Andrews said.

The state tax rate will depend on your income bracket.

There are also some things you should know about your federal tax situation as well. You are younger than 59 1/2 years old, the age when the IRS doesn't charge a 10 percent penalty for early withdrawals from 401(k)s.

It appears that your circumstances are such that you will escape this added tax, said Stan Howard, who has a Honolulu-based tax practice. He said the penalty doesn't apply to people who are at least 55 and have been "separated" from their work.

Both Howard and Andrews recommended you forgo taking a distribution at this time and instead consider rolling the plan into an individual retirement account.

"He could roll it over into an IRA and avoid all penalties and taxes," said Andrews.

Howard said you would have 60 days from the date on your distribution check to roll it over into an IRA. But he recommends you do a direct rollover and avoid ever taking possession of the money.

If you do get the check, the IRS will take 20 percent off the top for tax withholding and you won't get that back until you file your taxes, Howard said. Even then, you'll be taxed on that money that was withheld, he said.

There's also a chance you may be able to withdraw some of the money once it's rolled over into an IRA, he said. The IRS allows early withdrawal of IRAs without penalty if there is a disability or if it will be used for health insurance if unemployed, higher education expenses or in several other circumstances.

You'll want to check with a tax adviser to go into these issues in-depth since individual tax situations vary.

You might also ask your employer or 401(k) plan adviser to help with your tax question.

Do you have a question about personal finance, taxes or other money matters? Reach Akamai Money columnist Greg Wiles at 525-8088 or gwiles@honoluluadvertiser.com