Because taking the withdrawal may push you into a higher tax bracket when you add it to your total income. You will get a 1099R at the end of the year to enter into your return. The Gross amount shows up on 1040 line 5a and the taxable amount on 5b. The withholding will show up on 1040 line 25b.
It has to break out and show the 10% penalty separately on your return (schedule 2 line 8 which goes to 1040 line 23). Then you get credit for all the withholding taken out on 1040 line 25b.
Now what about a IRA? You have 60 days to roll over some of it to a IRA. That will reduce the tax on it so if the withholding was on the full amount you may get a refund on your tax return. When you enter the 1099R it will ask what you did with it. You can enter the amount you rolled over to IRA.
