I'm assuming that on the 401K withdrawal, a certain amount of taxes is taken out up front when the disbursement is made to me (maybe the 10%, or maybe the 27% or whatever my tax bracket might be). In any case, is there a chance that losses carried over from prior year taxes could help offset the taxes owed on early 401k withdrawal? Meaning, if I withdraw $10,000 from 401k and have $10,000 in stock and real estate losses that will carry over to next year (2009 taxes), is there a chance it could turn out to be a "wash" on the taxes owed? Except the 10% penalty of course.

If you take a distribution from your 401(k) the plan administrator will automatically withhold 20% for federal income tax. They do not withhold for state/local income tax, nor do they withhold the 10% penalty. The distribution is considered ordinary income, so the actual tax you will ultimately owe depends on your Adjusted Gross Income, filing status, etc. Since this is ordinary income, not capital gains, you are limited to off-setting your income by a maximum of $3K in capital losses - the remainder gets carried to the next year. So using your figures: if you have a $10K distribution and $10K in losses, you net iincome s $7K for 2009, and a carryover of $7K in losses to 2010.