Yes, you have to report the withdrawal as income on your tax return. The 20% that was taken out is not the tax on the withdrawal. It's withholding, just like tax withheld from your pay when you have a job. Withholding is an advance payment towards your tax for the year, but it's not the final tax. You will receive a Form 1099-R for the IRA withdrawal. The 1099-R will show the amount you withdrew and the amount of withholding. You enter the information from the 1099-R in TurboTax, along with all your other tax information. Your tax return will calculate the total tax on all your income for the year, including the IRA withdrawal. The tax withheld from the withdrawal will be added to any other withholding that you had during the year, and the total withholding will be applied towards your total tax.
