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You can avoid tax and penalties on the distribution by rolling it over into an IRA. But you must do that within 60 days of the distribution.

You didn't mention when this distribution happened, so that time may have already passed. If so, there's not a whole lot you can do. It would be taxable to you, and if you are under 59 1/2, you'll have to pay a 10% penalty on top of the income tax.

The Federal withholding should have been 20% of the distribution. State withholding will depend on your state laws - I can't comment there.

--Peter
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