There are two methods of recycling a sweater into re-usable yarn. The first method is done from a work-in-progress (wip), the second method is done from an already finished-object (fo).
Step 1: Remove the Needles
Then, lay the offending sweater flat sew you can begin frogging. Frogging is the process of ripping the stitches out: As in, "Rip it, rip it, rip it!"
Step 2: Frog It!!
As you rip out the stitches, gently wind the yarn into a ball.
Frequently remind yourself that you will not knit clothes that will not fit you like the model in the picture, unless the model in the picture has a similar form to your own.
Step 3: Continue Frogging the Sweater.
Wind gently so you do not stretch the yarn out anymore than it is already. This is especially important if you are unraveling a cotton, silk or wool sweater.
Step 4: Locating the Seams of a Finished Sweater to Frog (rip It).
The arrows in 3rd picture show the seams in a knit vest that was way too small for my son.
If the seams are super snug, take a pair of scissors with very sharp points and carefully slide a point underneath one of the seam stitches and snip it. Make sure you do not cut into the knitted portions of the sweater. Picture 4 shows the snip being made.
Step 5: Continue Unseaming the Knit Object.
Do this to every seam in the knit object. Then lay out your pieces as flat as possible.
Step 6: Locate Where the Knitting Was Cast Off.
A piece of knitting has a cast on edge (where the knitting was started) and a cast off edge (where the knitting was finished). The cast on edge is usually comprised of what looks like a straight row of stitches (Pic 1). The cast off edge looks like a series of V's (Pic 2).
The end you want to rip from, is the end that looks like a row of V's across it's top or bottom. Remember, most sweaters and knit objects are knit from the bottom up, so your cast off edge will usually be near the top.
Step 7: Find the End Stitch and Undo the Finishing Knot.
Pics 1 & 2 show the locating of the finishing knot on the knit side of the swatch and the undoing of it.
Pics 3, 4, & 5 show the yarn being liberated from it's knot. Now you can rip out the knitting as shown in steps 2 & 3.