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Good morning. The 20% withheld simply acts just like the withholding on your employment compensation. The distribution is taxed as ordinary income on your Form 1040 and added to your other income to determine your taxable income. Then, once your tax is determined on that ordinary income, the amount withheld is credited against the tax due. So, if you take a withdrawal of $25,000 and the additional tax is 30% of that...which is $7500, the 20% withheld (i.e., $5,000) is then credited against that tax, leaving you owing an additional $2500 when you file your 1040.
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