A Roth IRA is a retirement account where earned income that is already taxed is set aside and grows tax-free until retirement. When the account owner turns 59 1/2, withdrawals may be made tax-free.
In your case, you are 40, and not eligible to take the “normal distribution”, but you are able to take out any contributions you made to the account after waiting 5 years from the first day of the tax year the first regular contribution was made.
So if you opened your Roth IRA account 7 years ago and withdrew $21,500, the first $20,000 would be tax-free, and the remainder would be subject to tax and penalty.
The tax-free portion represents your basis, what you put in the account. Remember, you paid the tax on this before you put it in the account.
The remaining $1,500 represents the income that has not been taxed. If you withdraw this before you are 59 1/2, this amount is subject to ordinary income tax rate and a 10% early withdrawal penalty.
The tax rate is based on your total taxable income for the year and isn’t calculated until you prepare your tax return. The penalty is 10% of the taxable amount and shows up on line 59.
The 20% tax you refer to is probably the mandatory withholding on the early withdrawal. This 20% does not represent the actual tax assessed, but the tax that is set aside and credited toward you when you file your taxes. If you had 20% withheld on your distribution, chances are you should get most of that back as a refund when you file your tax return.
Roth IRAs can be complicated because of the requirements in IRC 408A, the ordering rules of the withdrawals, and the forms necessary to report the income, exclusions,and penalties. If your result doesn’t make sense, you may want to a tax professional to review your situation.