First of all, there is a 10% PENALTY for taking the money out if you take it out before age 59 1/2. That is 10% of the entire distribution. Then the entire distribution is also subject to your ordinary income tax rate. That could be as low as 10% or as much as 361/2 % depending on your tax bracket. (OUCH) , in addition to any state taxes due which depends on your state.

The answer is maybe. You will pay at your normal tax rate when you file your taxes since it will be treated as income. You will get to count the 25% you have having them withhold as a prior withholding so this will reduce any additional amount you ma owe at tax time.

You will also be assessed a 10% tax on the entire amount if you are not 59.5 years old or older. That will be calculated on your tax return. If you are older than that you don't have to worry about it as this excise tax goes away at age 59.5.

When you file your 2011 tax return, you report the distribution as income. The withholding that they kept will also go on your return as a payment, same as the withholding on a W-2.

Depending on the rest of your tax situation -- age, filing status, exemptions, adjustments, deductions, credits -- the withholding might be just right, too little, or too much. It is only the prepayment of an estimate.

You might want to take your 2010 tax return, add the 401(k) distribution, and re-calculate the tax. The easiest way would be to find an on-line tax calculator (I think hrblock.com and turbotax.com still have theirs up), rough in the income and look at the tax result. Or sit down with a tax advisor (call and ask if they do this for free, some do).