I am removimg money from my 401k plan & the annuity is assessing me a 8% penalty. Is the IRS going to penalize me as well or is it just categorized as ordinary income?

Depends on your age - are you over 59-1/2? If so, then you pay ordinary income traxes on the withdrawal. If you are under 59-1/2, you will also have to pay Uncle Sam a 10% penalty for early withdrawal.