Form 5329: Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts (2011)

What the Form Is For

Form 5329 is the IRS form you use to calculate and report additional taxes on retirement accounts and other tax-advantaged savings plans when you've broken certain rules. Think of it as the penalty form for retirement accounts. You'll need this form when you've taken money out of your retirement accounts too early, contributed too much, or failed to take out the required minimum amount once you've reached a certain age.

The form covers eight different types of penalties across various accounts including traditional IRAs, Roth IRAs, employer retirement plans like 401(k)s, Coverdell Education Savings Accounts (ESAs), Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (MSAs). Each penalty type has its own section on the form, making it straightforward to identify which part applies to your situation. The most common penalties include the 10% additional tax on early withdrawals before age 59½, the 6% annual tax on excess contributions that exceed legal limits, and the hefty 50% tax on required minimum distributions you should have taken but didn't.

When You’d Use Form 5329 (Late/Amended)

You'll typically file Form 5329 attached to your regular Form 1040 tax return for the year when the taxable event occurred. The form follows the same deadline as your main tax return—usually April 15 of the following year, plus any extensions you've requested. However, there's good news if you only owe the 10% early withdrawal penalty and your Form 1099-R clearly shows distribution code 1 in box 7 for all early distributions: you can report this tax directly on your Form 1040 without filing Form 5329 at all.

If you didn't file Form 5329 when you should have, you'll need to file it for that prior tax year. You must use the version of Form 5329 from the specific year in question—you cannot use a current form for a past year. If you haven't previously filed a tax return for that year, you can file just Form 5329 by itself by including your address on page 1 and signing page 2. If you've already filed a tax return for that year, you'll need to attach the prior year's Form 5329 to Form 1040X (Amended U.S. Individual Income Tax Return). When filing an amended 2011 Form 5329, check the box at the top of page 1 to indicate it's an amended return. Don't use the 2011 form to amend returns for other years.

Key Rules or Details for 2011

The 10% early distribution penalty applies to most withdrawals from retirement accounts before you reach age 59½. This includes traditional IRAs, Roth IRAs, SIMPLE IRAs, SEP IRAs, 401(k) plans, and other qualified retirement plans. The penalty increases to 25% if you withdraw from a SIMPLE IRA within the first two years of participating in the plan. The tax applies only to the taxable portion of your distribution—amounts you've already paid tax on aren't penalized again.

Importantly, numerous exceptions can save you from this penalty. You won't owe the 10% tax if you took the distribution due to total and permanent disability, death, to pay unreimbursed medical expenses exceeding 7.5% of your adjusted gross income, or for health insurance premiums if you're unemployed. Other exceptions include distributions for qualified higher education expenses, first-time home purchases up to $10,000, payments to reservists called to active duty for at least 180 days, and substantially equal periodic payments over your lifetime. For employer plans specifically, you can avoid the penalty if you separated from service in or after the year you turned 55 (age 50 for qualified public safety employees). Each exception requires entering a specific exception code on the form.

The 6% excess contribution penalty applies annually to the amount you've contributed beyond legal limits. For 2011, traditional IRA and Roth IRA contribution limits were generally $5,000, or $6,000 if you were age 50 or older. This penalty continues every year the excess remains in the account, making it crucial to correct quickly. You can avoid the penalty by withdrawing the excess contributions (plus any earnings on them) by your tax return deadline including extensions, or up to six months afterward if you file an amended return. Alternatively, the excess can be absorbed in future years when you contribute less than the maximum allowed.

The 50% required minimum distribution (RMD) penalty is the most severe. Once you reach age 70½, you must begin taking minimum distributions from traditional IRAs and most employer retirement plans by April 1 of the following year. The penalty is 50% of the difference between what you should have withdrawn and what you actually took. Fortunately, the IRS can waive this penalty if you can demonstrate the shortfall resulted from reasonable error and you're taking steps to remedy it. To request a waiver, enter ""RC"" on the dotted line next to line 52 with the amount you're requesting to be waived in parentheses, and attach a detailed explanation.

Step-by-Step (High Level)

Start by determining which part of Form 5329 applies to your situation. The form has eight distinct parts, each addressing a different penalty type. Most taxpayers will only need to complete one or two parts. Part I addresses early distributions, Part II covers education account distributions, Parts III and IV handle excess contributions to traditional and Roth IRAs, Part V deals with Coverdell ESA excess contributions, Parts VI and VII address Archer MSA and HSA excess contributions, and Part VIII covers missed required minimum distributions.

For early distribution penalties in Part I, enter the total amount of your early distributions that were included in your taxable income on line 1. This amount comes from your Form 1099-R and may also include amounts from Form 8606 if you have Roth IRA distributions. On line 2, enter any amounts that qualify for an exception to the penalty, along with the two-digit exception code from the instructions. Common codes include 01 for distributions after age 55 separation from service, 03 for disability, 08 for higher education expenses, and 09 for first-time home purchases. Subtract line 2 from line 1 to get your taxable amount on line 3, then multiply by 10% (or 25% for early SIMPLE IRA distributions) to calculate your penalty on line 4.

For excess contribution penalties in Parts III through VII, the process involves calculating any prior year excess contributions that haven't been corrected, determining your current year contribution limit, accounting for any distributions or corrections made during the year, calculating your current year excess contributions, adding prior and current year excesses together, and applying the 6% rate to the smaller of your total excess or your year-end account balance. The form walks you through each calculation step by step.

For required minimum distribution penalties in Part VIII, you'll need to determine your required minimum distribution amount for 2011 based on your account balance and applicable life expectancy tables from IRS Publication 590. Enter this amount on line 50, enter what you actually received on line 51, calculate the shortfall on line 52, and multiply by 50% on line 53. If requesting a waiver, make your notation on line 52 before calculating line 53.

Common Mistakes and How to Avoid Them

Many taxpayers unnecessarily file Form 5329 for simple early distributions when they could report the tax directly on Form 1040. If your Form 1099-R shows distribution code 1 in box 7 for all your early distributions and you don't qualify for any exceptions, you can skip Form 5329 entirely and just enter the 10% penalty on Form 1040, line 58. This saves time and reduces paperwork. Only file the form if you're claiming an exception, if the distribution code is incorrect, or if you have other penalties to report.

Another frequent error involves failing to claim legitimate exceptions to the early distribution penalty. Taxpayers often assume any withdrawal before 59½ will be penalized, but the numerous exceptions can eliminate the tax entirely. Review the complete list of exceptions carefully. For instance, if you lost your job and used IRA funds to pay health insurance premiums, that qualifies for exception 07. If you withdrew funds to pay large medical bills, calculate whether they exceed 7.5% of your adjusted gross income to qualify for exception 05. Missing these exceptions means paying unnecessary taxes.

People also commonly misunderstand how to correct excess contributions. Simply withdrawing the excess amount isn't enough—you must also withdraw any earnings on that excess contribution and report those earnings as taxable income. However, the earnings themselves aren't subject to the 6% penalty; they're only subject to the 10% early distribution penalty if you're under 59½. The calculation can be complex, so work with your IRA custodian to determine the correct earnings amount. Additionally, if you've made excess contributions in multiple years, you must work backward from the oldest excess first when calculating corrections.

For required minimum distributions, starting the calculation with the wrong account balance is a critical mistake. You must use your account balance as of December 31 of the prior year—for 2011 distributions, that means your December 31, 2010 balance. Don't use your current year-end balance or some other date. Also, if you have multiple traditional IRAs, you can total the required distributions and take the entire amount from just one IRA if you prefer, but you must calculate the RMD for each IRA separately first. Employer plans don't allow this aggregation; RMDs must come from each individual employer plan.

What Happens After You File

Once you file Form 5329 with your tax return, any additional taxes you've calculated become part of your total tax liability for the year. Include the amounts from the various parts of Form 5329 on Form 1040, line 58, alongside your regular income tax. The IRS will process Form 5329 as part of your complete return, and the additional taxes are due by your regular tax return deadline. If you owe money, you'll need to pay it along with your other taxes to avoid interest and late payment penalties on top of the retirement plan penalties.

If you've requested a waiver of the 50% required minimum distribution penalty, the IRS will review your explanation and supporting documentation. They will consider whether your failure to take the RMD resulted from reasonable error rather than intentional disregard of the rules. Acceptable reasons might include relying on incorrect information from a plan administrator, serious illness during the distribution period, or confusion following a recent divorce. The IRS wants to see that you've already taken steps to correct the problem—usually by taking the missed distribution as soon as you discovered the error. Approval isn't automatic; the IRS will send you a letter explaining their decision, which can take several months.

The IRS may audit or question your Form 5329 just like any other tax form, particularly if you've claimed exceptions to penalties or requested waivers. Keep detailed records supporting your positions, including Forms 1099-R showing your distributions, contribution records from your IRA custodian, documentation of qualifying expenses that support your exception claims, calculations of earnings on withdrawn excess contributions, and correspondence with plan administrators. For medical expense exceptions, keep receipts and insurance explanations of benefits. For education expense exceptions, maintain tuition statements and related documentation.

FAQs

If I took money from my IRA to pay for my daughter's college tuition, do I still have to pay the 10% penalty?

No, qualified higher education expenses are an exception to the 10% early distribution penalty. You can withdraw from your IRA to pay for tuition, fees, books, supplies, and equipment required for enrollment at an eligible educational institution for yourself, your spouse, or any child or grandchild without penalty. Room and board also qualifies if the student is enrolled at least half-time. You'll report this on Form 5329 by entering the amount used for education expenses on line 2 with exception code 08. However, you still must pay regular income tax on the distribution if it comes from a traditional IRA—only the extra 10% penalty is waived.

I contributed $6,000 to my IRA last year but later realized I was only allowed to contribute $3,500 because of my income. What should I do?

You need to remove the excess $2,500 contribution plus any earnings attributable to it before your tax return deadline (including extensions) to avoid the 6% annual penalty. Contact your IRA custodian and request a return of excess contributions. They will calculate the earnings portion and send you both amounts, issuing a Form 1099-R for the earnings, which you'll report as taxable income. If you're under 59½, the earnings portion will be subject to the 10% early distribution penalty, but the $2,500 principal will not. If you've already filed your tax return, you have up to six months after the original deadline to make this correction by filing an amended return. If you don't correct the excess, you'll owe a 6% penalty on the $2,500 every single year it remains in the account.

My Form 1099-R has code 1 in box 7, but I withdrew the money to buy my first house. Do I need to file Form 5329?

Yes, you must file Form 5329 even though you qualify for an exception. Code 1 indicates an early distribution subject to penalty, and the IRS doesn't know from the code alone that you qualify for the first-time homebuyer exception. File Form 5329 and enter the amount used for the home purchase (up to $10,000 lifetime limit) on line 2 with exception code 09. This will reduce or eliminate the penalty on line 4. Without Form 5329, the IRS will assume you owe the full 10% penalty and will send you a notice assessing the tax plus interest. To qualify for this exception, you must use the money within 120 days to buy, build, or rebuild a first home for yourself, your spouse, or certain ancestors or descendants, and neither you nor your spouse can have owned a home in the prior two years.

I forgot to take my required minimum distribution last year. Will I really have to pay a 50% penalty on that amount?

Not necessarily. While the law imposes a 50% penalty on the shortfall, the IRS routinely waives this penalty for taxpayers who missed the distribution due to reasonable error and take corrective action. Take your required distribution as soon as possible if you haven't already, then file Form 5329 for the year you missed the distribution. On line 52, enter ""RC"" and the amount you want waived in parentheses, then attach a detailed statement explaining why you missed the distribution and what steps you've taken to correct the problem. Common acceptable explanations include relying on incorrect advice from your plan administrator, serious personal or family illness, or confusion after a spouse's death. The IRS reviews waiver requests individually and will notify you of their decision.

Can I use my 401(k) distribution to pay off credit card debt without paying the penalty if I'm over 55 and left my job?

Yes, if you separated from service (left your job) during or after the year you turned 55, you can take distributions from that employer's 401(k) plan without the 10% early distribution penalty, regardless of what you use the money for. This is one of the most valuable exceptions for early retirees. However, this exception applies only to distributions from the employer plan where you worked when you left; it doesn't apply to old 401(k) plans from previous employers or to IRAs. If you've rolled your 401(k) into an IRA, the age-55 exception no longer applies—you'd have to wait until 59½. When you file Form 5329, enter the distribution amount on line 2 with exception code 01. For qualified public safety employees like police officers and firefighters, this exception is even better: you can access your retirement funds penalty-free starting at age 50 if you've separated from service.

I took early distributions from both my traditional IRA and my Roth IRA. How do I report both on Form 5329?

You'll report both distributions on the same Form 5329, but they're handled differently. For your traditional IRA distribution, enter the taxable amount from box 2a of your Form 1099-R on line 1. For your Roth IRA distribution, you'll need to complete Form 8606 first to determine how much is taxable, then enter the amount from Form 8606, line 25, on Form 5329, line 1 along with your traditional IRA amount. The total of both distributions goes on line 1. If any portion qualifies for exceptions, enter the exception amount on line 2 with the appropriate codes. Roth IRA distributions follow special ordering rules—your contributions come out first (always tax and penalty-free), then conversions and rollovers, then earnings—so you may find that much of your Roth distribution isn't subject to penalties even if you're under 59½.

Do I have to file a separate Form 5329 for my spouse, or can we use one form for our joint return?

If both you and your spouse need to file Form 5329, you must complete a separate form for each person—retirement accounts and their associated penalties are individual, not joint. However, you'll add the calculated taxes from both forms together and report the combined total on your joint Form 1040, line 58. Each Form 5329 should include the name and Social Security number of the individual whose retirement accounts are being reported. Attach both forms to your joint tax return. This separation is important because contribution limits, required distributions, and exception eligibility are all determined individually, even for married couples filing jointly.

Sources: All information in this summary comes exclusively from official IRS sources:

• Form 5329 (2011)
• Instructions for Form 5329 (2011)
• About Form 5329
• Retirement Topics - Exceptions to Tax on Early Distributions
• Retirement Topics - Required Minimum Distributions

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