Yeah you pay a 10% penalty for it and then you have to pay taxes on it according to your income that year.

The vast majority of the time it's financially ruinous, but not necessarily always. Many companies match what you put into your 401k, so you're getting a 100% or maybe 80% return, and it can make financial sense to use that money to pay off large debts, because those matching company funds more than pay for the 10% penalty. It also helps if you have a high earning potential and can afford to save a higher amount away later to compensate for what you took out.

But if you are barely able to fill that account, you're basically fucked if you have to drain that account.