b. Roth IRA Account Less Than 5 Years
Any Roth withdrawal taken before passing the five-year test is also a nonqualified withdrawal. As such, it’s potentially (but not necessarily) subject to income tax and a 10% penalty tax.
In this scenario, nonqualified withdrawals are generally handled under the same three-layer system as discussed in Part B. Most importantly, nonqualified withdrawals from layer 3 are 100% taxable. Fill out Part III of Form 8606 to calculate the taxable amount from layer 3, and enter that figure on Line 15b of Form 1040.
The only difference in this situation is you’re never hit with the 10% penalty tax on withdrawals taken after reaching age 59½. If you’re younger, however, the penalty tax will bite unless you’re eligible for an exception. (For a list of the exceptions, see How to make penalty-free IRA withdrawals.) If you owe the penalty tax, fill out Form 5329 and enter the penalty on line 58 of Form 1040.