What tax treatment applies if an individual decides to withdraw their Roth IRA earnings before the qualifying five-year period?

When an individual decides to withdraw their earnings from a Roth IRA before the qualifying five-year period, that withdrawal is subject to specific tax treatments due to it being considered an early distribution. Essentially, Roth IRA earnings must meet certain conditions, including being maintained in the account for at least five years, in order to be withdrawn tax-free.

If the earnings are withdrawn prior to this five-year period, they will likely be subject to taxation as ordinary income since they do not meet the requirements for tax-free withdrawal. Additionally, because this is deemed an early withdrawal of earnings, it can incur a 10% early withdrawal penalty unless an exception applies, such as for first-time home purchases or other qualifying circumstances.

It's important to note that contributions to a Roth IRA can be withdrawn at any time without penalties or taxes imposed, but this only applies to the contributed amounts, not to the earnings accrued on those contributions. Thus, the correct treatment of withdrawing earnings prior to the five-year period entails potential taxes and penalties, making the correct answer pertinent to the tax implications faced by the individual in this scenario.