Withdrawals from a 401k are always taxable income. If you are under age 59-1/2, there is an additional 10% penalty for early withdrawal. There are three exceptions to that penalty that may be useful to you.
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-o...
1. An exemption on up to $5000 withdrawn for the birth or adoption of a child. However, the withdrawal is only eligible when made in the 1 year AFTER the child is born, not before.
2. An exemption on up to $1000 withdrawn for a family financial emergency. There is no specific definition of emergency in the law. However, you can only make this type of emergency withdrawal once every 3 years, unless you pay it back in between.
3. An exemption on medical expenses that are more than 7.5% of your AGI. In other words, if your AGI is $100,000 and your medical expenses are $20,000, then you could withdraw up to $12,500 and pay the income tax but not the penalty. If you withdrew more than that, it would be subject to the penalty.
Separately, you can list medical expenses not reimbursed by insurance as an itemized deduction. If the expenses are more than 7.5% of your AGI, and you itemize your deductions, the expenses over the 7.5% floor will be included in your deductions. Exactly how much tax benefit you get will depend on your other itemized deductions (like state and local taxes, mortgage interest and gifts to charity).
You can use the penalty exclusion and the itemized deduction at the same time. You don't have to reduce your itemized deductions by the amount of your 401k withdrawal.
