If we use our 401K to purchase a primary residence, do we still have to pay income taxes at the normal tax Rate? It is not our first residence, but we want to pay for it, as it is a foreclosure and we can get a good price paying cash.

If you merely borrow money from your 401 K, ( you have to pay it back of course) there is no tax penalty on it and it does not effect your income tax

Fr_Chuck points out why taking a loan from your 401(k) is generally a better idea than taking a withdrawal. There are other advatages as well - such as the interest you pay on the loan is paid to yourself, and by continuing to make payments ultimately your 401(k) account will continue to grow, so you stay on track towards your retirement planning goal.

But to answer your question - if you take a withdrawal you will have to pay ordinary income tax on it (both federal and state/local if applicable where you live), PLUS the 10% early withdrawal penalty if you are under age 59-1/2. They will withhold 20% for income tax from the withdrawal amount, but this is just withholding - whether more or less is actually due is dependent on your tax bracket. The withdrawal may push you to a higher tax bracket than you are normally in.