The taxes you are required to pay on this withdrawal depends on the type of retirement plan your company has established. Most companies now offer 401(k) retirement savings accounts for their employees, though some companies still use private retirement plans or fixed-benefit pension plans. From the description in your question, I believe that the account to which you refer is a 401(k) plan.
Money deposited into a 401(k) is paid into the account on a pre-tax basis. Your employer takes money from your pre-tax earnings and deposits the money into the 401(k) account on your behalf, along with any contribution made by your employer. Therefore, you have not paid income taxes on the money in your 401(k) account. Because of this, if you decide to withdraw any money from your 401(k) account, you are required to pay taxes on the money at your current, regular income tax rate. For this reason, 401(k) accounts are referred to as “tax deferred” savings accounts.
To learn more about 401(k) plans, I encourage you to read the IRS document Topic 424 - 401(k) Plans.
Generally speaking, if an account holder wishes to make an early withdrawal from his 401(k) account, he will be charged a 10% penalty tax in addition to the regular income taxes he will be required to pay on the money. Taking money out of a 401(k) account can thus result in a tax obligation of 35% or more of the total amount withdrawn. For example, if you withdrew $10,000 from your 401(k), you could be charged $3,500 or more in taxes and penalties. The penalties Congress wrote into the 401(k) law are designed to discourage Americans from making premature withdrawals from their 401(k) accounts. 401(k)s are designed to help workers save for retirement and not as a means of saving for other purposes.
You will almost always be required to pay some income taxes on any withdrawal from your 401(k) account, regardless of the reason for the withdrawal. These taxes are due because you have not yet paid taxes on the money deposited in your 401(k) account. While you generally cannot avoid regular income taxes on the 401(k) withdrawal, you can, under certain circumstances, be excused from 10% additional tax penalty charged on most early withdrawals.
To read more about the rules regarding early withdrawals from tax-deferred retirement accounts, read the IRS document 401(k) Resource Guide - Plan Participants - 401(k) Plan Overview and 401(k) Resource Guide - Plan Participants - General Distribution Rules.
Your Next Steps
I think that the best thing you can do in this situation is to consult with a qualified tax attorney or certified public accountant. A professional tax advisor should be able to tell you what taxes you are required to pay, from what taxes you may be exempt, and how to assert any exemptions that you may have. You may also want to contact the IRS directly to discuss your situation and ask what taxes are legitimately owed. Also review the IRS’s 401(k) Resource Guide.
I hope this information helps you Find. Learn & Save.