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"If you take a withdrawal from your 401K plan, you will owe tax on the full balance at regular income tax rates, regardless of how you choose to invest the proceeds."

So you can invest the difference (the ~$300,000 less the taxes) however you want -- in municipal bonds, if you like.

If you rollover the 401K funds into another tax-deferred plan (rollover IRA or another 401k), you probably don't want that investment in municipal bonds. They earn less, and the rollover IRA or 401k isn't taxed any, so you lose the "tax benefit" of municipals.

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