Form 5329: Additional Taxes on Qualified Plans Definition

What Is Form 5329: Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts?

Form 5329: Additional Taxes on Qualified Retirement Plans (including IRAs) and Other Tax-Favored Accounts is a tax form that is filed by taxpayers to indicate whether they owe the Internal Revenue Service (IRS) the 10% early-distribution or another penalty on a retirement plan or education savings plan. Common triggers for Form 5329 include receiving early distributions and making excess contributions to qualified retirement accounts. Form 5329 must accompany a taxpayer's annual tax return.

Key Takeaways

  • Form 5329 must be filed by taxpayers with retirement plans or education savings accounts who owe an early distribution or another penalty.
  • The form must be submitted with a taxpayer's annual tax return—Form 1040 or Form 1040-SR.
  • Taxpayers who do not file the form could end up owing more in penalties and taxes.
  • A taxpayer must provide their personal information and fill out the appropriate section(s) on the form.
  • Form 5329 may be filled out manually or electronically.

Who Can File Form 5329?

There are several circumstances that would lead you to file Form 5329. For the most part, you must complete and submit this form to the IRS with your tax return if you:

  • Received any early distributions from a qualifying tax-favored account, such as a 401(k) or IRA
  • Made contributions in excess of the annual limit to a qualifying tax-favored account

You generally cannot take any money out of your retirement accounts before the age of 59½. Anything that is withdrawn before that age is considered an early distribution. Similarly, you are not allowed to contribute over a certain amount to any retirement account based on the annual limits published by the IRS. The table below denotes the annual maximums per account.

  2022  2023 
IRA (Traditional and Roth)  $6,000  $6,500 
SIMPLE IRA $15,500 $14,000
401(k) and SARSEP $20,500  $22,500 
SIMPLE 401(k) $14,000 $15,500
ESAs $2,000 $2,000

People 50 and older can also make catch-up contributions, which are additional contributions over and above the listed amounts. For instance, catch-up contributions for the following accounts are:

Anything over and above these amounts is considered an overcontribution, which triggers a penalty.

You must also fill out Form 5329 if you don't take the required minimum distributions (RMDs), which is the minimum amount of money that you can withdraw from these accounts after you reach a certain age. You must take RMDs by April 1 the year after you turn:

  • 70½ if you reached that age before Dec. 31, 2019
  • 72 if you reached that age between Jan. 1, 2020, and Dec. 31, 2022
  • 73 if you reached that age after Jan. 1, 2023

Excess contributions must be withdrawn by the tax-filing deadline for IRAs and by June 1 of the following year for ESAs. Any amount not removed by the deadline may be subject to a 6% excise tax for each year the excess amount remains in the account. This tax may also apply to ineligible rollovers, ineligible transfers, and excess simplified employee pension (SEP) contributions unless they are corrected in a timely manner.

There are other circumstances that may require you to file Form 5329, including:

  • When you receive a distribution from a retirement plan that meets an exception to the early distribution penalty, but the exception is not indicated on the Form 1099-R or Form 1099-Q issued by the issuer or account custodian. In this case, you must complete Part l of Form 5329.
  • If you receive a distribution from a retirement account that does not meet any exception to the penalty and if the issuer mistakenly indicates that an exception applies. The individual must complete Part l of Form 5329.
  • When you receive a distribution from a college savings plan, such as a Coverdell education savings account, but it wasn't used for eligible education expenses, you don't meet an exception to the early distribution penalty. In this case, you should complete Part II of Form 5329.

According to the IRS, you aren't required to pay the 10% penalty on an early distribution if all or part of the distribution was rolled over from a qualified retirement plan. Details on how to report the rollover can be found on IRS Form 1040 or 1040-SR in lines 4a and 4b or 5a and 5b.

Watch Out for Errors

Sometimes, the issuer may not make the proper indication on the form. Say, for instance, an individual received distributions via a substantially equal periodic payment (SEPP) program from the IRA. However, instead of using Code 2 in Box 7 of Form 1099-R, the issuer used Code 1, which means that no exception applies.

This could lead the IRS to believe the amount reported on Form 1099-R is not part of the SEPP. It will appear that the person has violated the SEPP program and now owes the IRS penalties plus interest on all past distributions that occurred as part of the SEPP.

Fortunately, the individual is able to rectify this error by filing Form 5329.

What Information Does Form 5329 Include?

You must include your personal details at the top of Form 5329, including:

Form 5329 is divided up into several parts, which means you must complete the section(s) that apply to your circumstances as follows:

  • Part I: Additional Tax on Early Distributions
  • Part II: Additional Tax on Certain Distributions From Education Accounts and ABLE Accounts
  • Part III: Additional Tax on Excess Contributions to Traditional IRAs
  • Part IV: Additional Tax on Excess Contributions to Roth IRAs
  • Part V: Additional Tax on Excess Contributions to Coverdell ESAs
  • Part VI: Additional Tax on Excess Contributions to Archer MSAs
  • Part VII: Additional Tax on Excess Contributions to Health Savings Accounts (HSAs)
  • Part VIII: Additional Tax on Excess Contributions to an ABLE Account
  • Part IX: Additional Tax on Excess Accumulation in Qualified Retirement Plans (Including IRAs)

The information on Form 5329 must be reported on and it must accompany Form 1040: U.S. Individual Tax Return or Form 1040-SR: U.S. Tax Return for Seniors by the tax filing deadline or extension date (if you have one).

Keep in mind that you may be responsible for additional forms in certain circumstances. For instance, you must complete Form 8853: Archer MSAs and Long-Term Care Insurance Contracts if you're filling out Part VI. Similarly, you may need to file Form 8606 to determine the amount of the distribution that is subject to the early distribution penalty for Roth IRAs.

The IRS may waive the tax on excess contributions if you can show that the shortfall was due to reasonable error and that you are taking appropriate steps to remedy it. You may want to consult with a tax professional for assistance with requesting the waiver from the IRS if you believe you qualify for this relief.

How to File Form 5329

Form 5329 can be filled out manually using the form from the IRS website. Once complete, submit it with your annual tax return and mail it to the IRS. The form can also be filled out electronically using tax preparation software or by using the services of a tax preparer, such as a tax professional or accountant. Using a tax professional may reduce or eliminate the possibility of error and additional penalties.

The forms must be filed by the individual's due date for filing their tax return, including extensions. If the form is being filed for a previous tax year, the form applicable to that tax year should be used. Failure to use the form for the correct tax year may result in the penalty being applied to the wrong year.

Form 5329
Form 5329.

You can download all pages of Form 5329 from the IRS website.

Who Needs to File Form 5329?

The IRS requires Form 5329 to report a taxpayer's early withdrawal of money from a retirement account and to record the penalties that are due if the withdrawal was not covered by one of the exceptions to the rules.

It also can be used to correct an error that would otherwise lead to a penalty. For example, the custodian of the account will send a Form 1099-R recording the withdrawal. An allowable withdrawal should be marked Code 2 in Box 7. If it is marked Code 1, the IRS will assume it's not covered by an exception and penalties will be charged. Form 5329 can be used to correct the record.

What Is an 'Early' Withdrawal from a Retirement Account?

An early withdrawal is one that is made before the account holder reaches age 59½.

The IRS imposes a heavy penalty for an early withdrawal unless the money is withdrawn for certain purposes.

There are a number of these exceptions, and the list changes from time to time. Current exceptions are made for educational expenses, a first-time home purchase, medical expenses, and more.

When Do I Have to Withdraw Money From My Retirement Account?

As of 2023, the age at which a retirement account holder must begin making annual withdrawals is 73. (From 2020 through 2022, the age for RMDs was 72. Earlier, it was 70½.)

The amount you must withdraw is based on the amount of money in the account and your own life expectancy. The tax return instructions include a table to help you calculate the amount.

Who Pays the Penalty for IRAs?

You are generally responsible for paying the penalty on IRAs, including those for excess contributions. In some cases, your IRA custodian or plan trustee is now allowed to pay the penalty on your behalf as long as there are enough funds in the account. When submitting a distribution request, you should elect to have amounts withheld only for federal and state tax, if applicable. Penalties must be paid directly to the IRS, and are usually recorded on your tax return.

The Bottom Line

Taking money out of a retirement account early can trigger penalties. Taking money out of a retirement account early and failing to report it properly can trigger more penalties. If you take an early distribution, whether or not you use the money for an allowable exception to the penalties, you can use Form 5329 to stay on the right side of the IRS.

Article Sources
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