401k has a 10% early withdrawal penalty. So you'd pay taxes at the base rate (and may owe more, they don't know what your total income will be) so in the numbers you gave as an example you were taxed 20%, but your tax obligation may be 24% for instance, so you'd owe an additional $400 in that case PLUS the early withdrawal 10% penalty on the amount not rolled over if you don't roll all the money into a tax deferred account. So again using 2,000 in this example you'd owe $200 in penalties. In total you'd owe $2000(base tax)+$400(actual tax rate difference)+$200(early withdrawal penalty)=$2600. I think you're confusing taxes with penalties when they're two separate things and additive in this case. If you put the gross $10,000 back into a trad IRA or 401k then you owe no taxes and no penalties, you'll be refunded come tax time.