I am already 59 1/2 but not yet retired and can withdraw from my 401K without the 10% penalty. I do know that my plan automatically retains the 20% (plus some) to give to Uncle Sam and state tax, as well. I would like to withdraw 40K as cash (no rollover to any IRA) because we want to donate to our church and maybe start a home business and spend some on home repairs, etc.

My question is, because I still have a very nice income, do you think I will end up paying additional taxes (even way more than that 20% plus) on this 40K, when it comes to tax time next April 15, 2009?

I suggest you contact your tax preparer. If you use tax software, you can try doing a What If and add the 40K to your taxable income and see what the additional tax will be.