Hi,
I got 5,000 in a distribution with 2500 being taxable. I thought that with this covid withdrawal there is an exemption for tax. So lets say I make 40000 annually and now adding this 2500 puts me into the 22 percent tax bracket now?
Could you clarify your question? What exactly are you asking?
For information on the Coronavirus-related relief for retirement plans and IRAs, please see this IRS Website.
For a Roth IRA, you may withdraw principal contributions at any time. Withdrawal of earning is subject to regular income tax plus a 10% penalty unless both of these statements are true:
1. You are age 59-1/2 or older
2. The Roth IRA is at least 5 years old.
There are a few exception to the 10% penalty, including coronavirus-related withdrawals if you can certify you had one of the listed financial impacts. But only the penalty is exempted, you still owe regular income tax.
[the above does not apply to a Roth 401(k), see @dmertz 's answer. the tax bracket discussion is still accurate]
Separately, being bumped into a higher tax bracket does not change the tax on all your income, just the amount over the bracket. For a single person in 2020, you pay
Don't forget the standard deduction, which is $12,400. You would have to report $52,525 before you are in the 22% bracket, and only the amount over $52,525 would be taxed at 22%, the amounts under that are taxed at zero, 10% and 12%.
A distribution from a Roth 401(k) is a proportionate mix of nontaxable contributions and taxable gains. If you are an individual qualified to receive a Coronavirus-Related Distribution, the taxable income can optionally be spread over 3 years and is exempt from any early-distribution penalty. Otherwise the taxable amount of the distribution is subject to income tax and, unless a regular exception applies, to an early-distribution penalty.