Mandatory income tax withholding of 20% applies to most taxable distributions paid directly to you in a lump sum from employer retirement plans even if you plan to roll over the taxable amount within 60 days.
Individuals must pay an additional 10% early withdrawal tax unless an exception applies.
Also keep in mind that when a 401(k) or 403(b) plan pays a distribution to you, the federal government requires that 20% of the distribution is withheld from the distribution for income taxes. This is just like the federal income tax withheld from your W-2… it’s kind of an "advance payment" on the income taxes that will be due on the taxable income you’re getting as a result of the withdrawal. There are certain exceptions from this withholding rule, like when you receive payments over time or when it’s a distribution due to hardship.
Your withdrawal gets taxed at your regular income tax rate, not at 20%. This means that if you have a lot of other income, or if that withdrawal was a lot of money, you’re very likely in a higher tax bracket than 20%: could be 25%, 28%, 33% or higher. The distribution gets added to your other income, then your income tax is figured on the total taxable income (after deductions). Your withholding, including the 20% withheld from the withdrawal, reduces your taxes due along with the withholding from any other sources like W-2s. You’ll see that 20% included on line 64 of Form 1040 along with any other withholding.
Please see the following helpful Turbo Tax links regarding this topic:
https://turbotax.intuit.com/tax-tips/retirement
https://blog.turbotax.intuit.com/tax-tip
The following link discusses the exceptions to the 10% penalty for early withdrawal on your retirement plan:
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distri...
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