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Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts

IRS Form 5329 is used by taxpayers to report additional taxes on IRAs and other qualified retirement accounts, as well as modified endowment contracts, Coverdell ESAs, QTPs, Archer MSAs, and HSAs. Married couples who file jointly must each file a separate Form 5329 if both owe a penalty.

Who Should File IRS Form 5329?

You may be required to complete IRS Form 5329 if any of the following apply:

  • You took an early distribution from a tax-favored account
  • You made excess contributions to a tax-favored account
  • You failed to take the required minimum distributions (RMDs)

How to Complete Form 5329

IRS Form 5329 consists of two pages and nine sections. Most taxpayers, however, will only complete one or two sections based on their specific circumstances.

Part I & II – Additional Tax on Early Distributions

If you withdraw money from a tax-favored account, such as an IRA or 401(k), before the age of 59 ½, you’ll generally get hit with a 10% IRS penalty. There are some exceptions to this rule, however, including:

  • Total and permanent disability
  • Paying for medical expenses that exceed 7.5% of your adjusted gross income (AGI)
  • Acquiring health insurance while unemployed
  • Active duty in the military reserves for more than 179 days

You may also avoid the 10% penalty if the withdrawal was used for higher education expenses (you, your spouse, child, or grandchild), or a first-time home purchase, unless it was taken from a 401(k).

Other types of withdrawals can also lead to an IRS penalty, such as:

  • Health savings account (HSA) money being used for anything other than out-of-pocket medical expenses
  • 529 plan or other education savings account (ESA) funds being used for anything other than qualified educational expenses (though there are a few exceptions to this rule)

Regardless of whether you owe a penalty or qualify for an exception, you’ll still need to complete Form 5329. Fill out Part 1 for early distributions from a tax-favored account. Complete Part II if you’ve taken money from an education or ABLE account.

Part III Through VIII – Additional Tax on Excess Contributions

You may be surprised to learn that many tax-favored accounts have contribution limits. And if you exceed these limits, the IRS will impose a 6% penalty for each year you leave the excess funds in your account. To avoid this penalty, remove the additional contributions before the tax filing deadline (or extension deadline, if applicable).

On IRS Form 5329, each type of account has its own section:

  • Part III – Traditional IRAs
  • Part IV – Roth IRAs
  • Part V – Coverdell ESAs
  • Part VI – Archer MSAs
  • Part VII – HSAs
  • Part VIII – ABLE accounts

Only complete the ones that are relevant to you.

Part IX – Additional Tax on Excess Accumulation in Qualified Retirement Plans

When you reach a certain age (typically 72), you are required to take minimum distributions (RMDs) from your traditional IRA or 401(k) before the end of the tax year. If you fail to withdraw the money, you can face steep IRS penalties. Generally, this is 50% of the amount you didn’t withdraw on time.

If you want to request a penalty waiver due to reasonable cause (illness, bank error, etc.), simply enter “RC” and the amount you want waived on the dotted line to the left of line 54. Be sure to attach an explanation of why you are requesting the waiver, as well.

Need Help?

If you need help completing IRS Form 5329, please refer to the form instructions or contact Tax Defense Network at 855-476-6920. We offer affordable tax preparation services for individuals and small business owners.