I left a job and they sent me my contribution to my 401K but took 20%. I thought once I reached 65 this would not be an issue. Are they suppose to take the 20% if I am over 59 1/?

Unless you tell them to do otherwise, the custodian is REQUIRED to withhold 20%.

You will STILL owe income taxes on the distribution even if you are over the 59.5 age threshold.

Whenever you take a withdrawal from your 401(k) it's counted as taxable income to you and they will withhold 20% for income tax. You may be thinking about that this has to do with a penalty for early withdrawal - but it doesn't.

They didn't "take out" 20% they withheld 20%. There is a difference. The withholding is in anticipation of your owing taxes on the income. Just like withholding from your salary.

When you file your tax return for the year the distribution was made, you will enter the amount of income and the amount withheld. If the withheld amount is more than your tax liability, you will get a refund.

There is a 10% penalty for early withdrawals, that probably doesn't apply to you. That is paid when you file your return.