There is no penalty for foreigners but rather a 30% mandatory income tax withholding from distributions from 401(k) plans. You will
"get it back" when you file the income tax return for the year and
calculate your actual tax liability (including any penalties for a
premature distribution from the 401(k) plan). You are, of course, a US citizen and not a foreigner, and thus are what the IRS calls a US person (which includes not just US citizens but permanent immigrants to the US as well as some temporary visa holders), but it is entirely possible that your 401(k) plan does not know this explicitly.
This IRS web page tells 401(k)
Who can I presume is a US person?
A retirement plan distribution is presumed to be made to a U.S. person only if the withholding agent:
- has a record of a Social Security number for the payee, and
- relies on a payee mailing address that’s
in the United States, or
in a foreign country with which the United States has an income tax treaty in effect giving its residents exemption from U.S. tax on payments of this type.
A payment that does not meet these rules is presumed to be made to a foreign person.
Your SSN is presumably on file with the 401(k) plan administrator, but perhaps you are retired into a country that does not have an income tax treaty with the US and that's the mailing address that is on file
with your 401(k) plan administrator? If so, the 401(k) administrator
is merely following the rules and not presuming that you are a US
So, how can you get around this non-presumption? The IRS document cited
above (and the links therein) say that if the 401(k) plan has on
file a W-9 form that you submitted to them, and the W-9 form
includes your SSN, then the 401(k) plan has valid documentation
to associate the distribution as being made to a US person, that is,
the 401(k) plan does not need to make any presumptions; that you are a US person has been proved beyond reasonable doubt. So,
to answer your question "Will I be penalized when I later start a regular monthly withdrawal from my 401(k)?"
Yes, you will likely have mandatory 30% income tax withholding on your regular 401(k) distributions unless you have established that you are
a US person to your 401(k) plan by submitting a W-9 form to them.