You are correct, if a 401(k) is withdrawn
prior to age 59 ½, the penalty is generally 10% , but you also owe income tax on
the withdrawal because the IRS considers it income.
The withholding works just like a W-2. If
you are under withheld, you will owe additional tax over and above the
withholding.
For instance, you had withheld 20%.which included your 10% penalty leaving another 10% as income tax. If your tax rate is above 10%, you would owe additional taxes on the distribution.
