It depends. For Federal purposes, a 401(k) distribution is taxable income at your marginal (tax-bracket) rate. In addition, if you are not 59 1/2 years of age or older at the time of taking the distribution, the distribution can be subject to an additional 10% penalty as an "early distribution. If you normally are able to claim the "Saver's Credit" (a credit of up to 50% on the amount you contribute to your 401(k) in the year, depending on your income level), the distribution will probably disallow the credit from being claimed. These consequences are avoided, however, if you are rolling over the distribution into another type of retirement plan. (Either another 401(k) or an IRA, for example. See your Plan Administrator for details if you are interested in rolling over the distribution).
The distribution may also be taxable to your state as well, depending on your state and the reason for the distribution.
For a consideration of exceptions to the early-distribution penalties, please click on the following link: Exceptions to penalty.
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