It is income. It doesn't matter what you do with it except if you roll it over to another 401K or IRA account. It will add to your income and may push you inter a higher tax bracket so be careful. And there is a 10% Early Withdrawal Penalty if you are under 59 1/2. But you can avoid the 10% penalty if you use money from a IRA instead of a 401K to buy a new house.
