Clarification: I realize there is no penalty for withdrawing money after the 401K is rolled over. Do I have to pay taxes on this money?

Yes, because the money in your retirement plan has zero basis (you never paid taxes on it when it was put into the account), it was a pretax reduction of your income, you are expected to pay income tax (as ordinary income) when you take the money out. This is one of the basic differences between the regular IRA and the Roth IRA. In the first your income is reduced to lower your taxes in the years you put money in, but you pay taxes when you take the money out; in the second, you do not get an income reduction and you pay no taxes when you take the money out. Some states will also tax retirement plans and others don't.

Oh my God. You answered all my questions perfectly! I will roll over to a ROTH IRA, instead. I had no idea until you helped me. Thanks so much. I will be at the Credit Union in the morning.

Just remember if you roll over into a Roth IRA, you will have to pay income tax on that money. That is the catch; otherwise it is the perfect solution. You can set up a regular IRA, and roll-over some of the money each year into a Roth. That will keep your taxes down as much as possible. Another plus of the Roth is that you do not have to start taking distributions at age 70 1/2, but can just leave the money there until you need it.