Yes. The amount that you use to pay taxes through withholding is still part of your taxable distribution. You are taking the entire amount as a taxable distribution and then using some of the resulting cash to pay your taxes.
If you are over age 65 and depending on how much you might be collecting in Social Security benefits, you might be eligible for a Maryland pension exclusion that would reduce the amount of the 401(k) distribution that is subject to Maryland state and local income tax. Also, to avoid an early-distribution penalty on a distribution from the 401(k) you would generally have to receive the distribution after reaching age 59½.
