The 10% is a "tax penalty" and it goes to the general fund like any other IRS penalty.
However regarding the tax implications in general, you’re not thinking far enough ahead. Yes the "25"% fed withholding will be with held. The 10% will not. Nor will state or local tax. The money will show up as income for that year affecting you’re state and local tax. Not to mention any bump in brackets for them and the fed. A good starting point is to figure 50%. The actual number will end up between 40 and 60% depending on income level. So plan on taking 25% of your distribution and forwarding it to various gov agency"s.
As mentioned in the other post loans are nice from the stand point you are paying yourself most of the interest. But can become a real burden if you lose your job. They normally they are - make scheduled payments (based on pay cycles) or pay it all off at once. Neither a real good option while looking for work. Any outstanding loan when employment is terminated will be treated as a distribution and unless you continue to make the payment or pay it off. Plus with a load default, there is no withholding and you are on the hook for it all (BTDT).
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