<<Can someone transfer out of their 401k with a company (say they quit) to an IRA set up at a discount brokerage ? Is this done without penalty ? >>

In the case of most 401k plans (but not all) you can withdraw your account balance when you terminate employment. In that case you can roll the money to an IRA. If you do this as a direct rollover there will be no withholding: the entire balance will go over. Otherwise the employer will withhold 20%. In this event you can still avoid penalty by coming up with that 20% out of pocket and contributing the full rollover amount to the IRA. Be sure you understand the rules thoroughly before taking this approach.

<<As I understand it an IRA has a $2000 limit for the amount you can discount from your yearly income, as opposed to a 401k which is upto 15% of your income .... is there another simple mechanism outside of a corporation which allows for a better tax shelter...
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That depends on what sources of income you have. Will you be self-employed? If so, you may be able to set up a plan that will accept contributions in excess of $2,000 per year.

KAT in Chicagoland
www.fairmark.com
Tax Guide for Investors