The law requires that the 401(k) plan withhold a minimum of 20% for federal income taxes because your distributions are eligible for rollover. Whether or not state income tax withholding is mandatory depends on the state. The 7.75% figure suggests mandatory Maryland tax withholding.
Underpayment of taxes is figured on a quarterly basis, so waiting until filing to pay your entire tax liability will generally result in underpayment penalties.
