Understanding Form 5329: Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts (2013)

What Form 5329 Is For

Form 5329 is the IRS form you use to report and pay additional taxes when certain rules about retirement accounts and education savings accounts are violated. Think of it as a penalty form for retirement and savings account mistakes. The form covers several types of tax-favored accounts, including traditional and Roth IRAs, employer-sponsored retirement plans like 401(k)s, Coverdell Education Savings Accounts (ESAs), Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (MSAs).

The form addresses six main types of violations: taking money out of retirement accounts too early (before age 59½), contributing more than the law allows to your accounts, taking distributions from education accounts for non-qualified expenses, and failing to take required minimum distributions when you reach age 70½. Each violation triggers a specific additional tax on top of your regular income tax. The most common additional tax is the 10% early distribution penalty, which applies when you withdraw retirement funds before reaching age 59½, though numerous exceptions exist. The form also imposes a 6% annual tax on excess contributions that remain in your account, and a harsh 50% tax on required minimum distributions you failed to take.

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

You must file Form 5329 with your regular tax return (Form 1040 or Form 1040NR) if any of the situations triggering additional taxes apply to you. For most taxpayers, this means attaching the form to your tax return by the regular April filing deadline, with extensions if applicable. However, there's a helpful shortcut: if you only owe the 10% early distribution tax and your Form 1099-R correctly shows distribution code 1 in box 7, you can report the tax directly on your Form 1040 without filing Form 5329 at all.

If you don't have to file a regular income tax return but still owe additional taxes on your retirement accounts, you must file Form 5329 by itself at the time and place you would normally file Form 1040. You'll need to include your address on the form and sign it. When filing an amended Form 5329 for 2013, check the box at the top of the form indicating it's an amended return. For prior tax years, you must use that year's version of the form—you cannot use the 2013 form to amend earlier years. If you need to amend only Form 5329 and have no other changes to your tax return, file the prior year's Form 5329 by itself. If you have other changes requiring Form 1040X (Amended U.S. Individual Income Tax Return), file the prior year's Form 5329 alongside it.

Key Rules to Understand

The early distribution penalty applies when you take money from retirement accounts before age 59½, but twelve numbered exceptions can save you from this tax. Exception 01 covers distributions from employer plans after separating from service at age 55 or older (age 50 for qualified public safety employees). Exception 02 protects substantially equal periodic payments made for your lifetime. Exception 03 applies if you become totally and permanently disabled, while Exception 04 covers distributions due to death. Medical expense distributions under Exception 05 are exempt up to your unreimbursed medical costs exceeding 10% of adjusted gross income (7.5% if you or your spouse are 65 or older). Exception 06 protects qualified domestic relations orders in divorces, and Exception 07 covers IRA distributions for health insurance premiums if you're unemployed. Exception 08 exempts distributions for higher education expenses, while Exception 09 protects up to $10,000 for first-time home purchases. The remaining exceptions cover IRS levies (10), qualified reservist distributions (11), and miscellaneous other situations (12).

Contribution limits for 2013 were $5,500 for traditional and Roth IRAs ($6,500 if age 50 or older). The 6% excess contribution tax applies annually to amounts exceeding these limits until you withdraw the excess or use up the excess through lower contributions in future years. For traditional IRAs, you cannot contribute anything in or after the year you reach age 70½. Roth IRA contributions face additional income phase-out rules: the contribution limit reduces or disappears entirely if your modified adjusted gross income exceeds $178,000 for married filing jointly, $112,000 for single filers, or $0 for married filing separately if you lived with your spouse during the year. Required minimum distributions must begin by April 1 of the year following the year you turn 70½, with a punishing 50% tax on any shortfall between what you should have taken and what you actually received.

Step-by-Step Filing Process (High Level)

Begin by gathering all your Forms 1099-R showing retirement account distributions, along with documentation of your contributions to IRAs, HSAs, Archer MSAs, and Coverdell ESAs. Review each distribution and contribution to determine which parts of Form 5329 apply to your situation—the form has eight separate parts addressing different violations, and you only complete the sections relevant to your circumstances.

For Part I (early distributions), enter the taxable amount of distributions you received before age 59½ on line 1. If you qualify for any exceptions, enter the exception code and the amount that's exempt on line 2. The difference goes on line 3, and line 4 shows your 10% additional tax (or 25% if the distribution came from a SIMPLE IRA within two years of first participating). For Parts III through VII dealing with excess contributions, you'll work through a series of calculations that start with any prior year excess amounts, subtract distributions and allowable contributions, and arrive at the current year's excess. The tax is 6% of the smaller of your total excess or the account value on December 31, 2013. Part VIII handles required minimum distributions by comparing what you should have received on line 50 with what you actually got on line 51, then calculating the 50% penalty on the shortfall.

After completing all relevant parts, transfer the tax amounts to Form 1040, line 58 (or Form 1040NR, line 56). If you're filing Form 5329 by itself without a tax return, sign the form at the bottom of page 2 and include payment made out to "United States Treasury" with your Social Security number and "2013 Form 5329" written on the check.

Common Mistakes and How to Avoid Them

Many taxpayers unnecessarily file Form 5329 when they could report the early distribution tax directly on Form 1040. Review your Form 1099-R carefully—if box 7 shows code 1 and you owe the tax on the entire distribution with no exceptions, skip Form 5329 and just enter the tax on Form 1040, line 58. Conversely, don't make the opposite error: you must file Form 5329 if you qualify for any exception to the early distribution tax, even if you owe no tax, because you need to document which exception applies.

The excess contribution trap catches people who don't realize these taxes compound annually. If you contributed $1,000 too much in 2012 and didn't fix it, that same $1,000 gets taxed again at 6% in 2013, and again in 2014, continuing until resolved. The solution is removing excess contributions before your tax return deadline, including any earnings on those contributions. You can avoid the entire tax on 2013 excess contributions by withdrawing them by the due date of your return, including extensions. For traditional and Roth IRAs, if you filed your return already, you have until six months after the due date to withdraw the excess, but you'll need to file an amended return with "Filed pursuant to section 301.9100-2" written at the top.

Another common error involves Roth IRA conversions and early distributions. When you convert a traditional IRA to a Roth IRA, the taxable portion of that conversion is subject to an additional penalty if you take it out within five years, even if you're over 59½. Taxpayers frequently misunderstand the ordering rules for Roth IRA distributions and incorrectly calculate which part of their distribution is subject to tax. Always complete Form 8606 first when dealing with Roth IRAs, then transfer the appropriate amounts to Form 5329. Finally, married couples filing jointly must each complete a separate Form 5329 if both have reportable items, then combine the total tax on Form 1040, line 58.

What Happens After You File

Once you file Form 5329, the additional taxes you calculated become part of your total tax liability for the year. The IRS will process the form along with your regular tax return and assess any amounts due. If you owed additional tax and paid it with your return, that's typically the end of the matter. However, if you claimed an exception to the early distribution tax or requested a waiver of the required minimum distribution penalty, the IRS may review your claim more closely.

For required minimum distribution shortfalls reported in Part VIII, the IRS has authority to waive part or all of the 50% penalty if you can demonstrate the shortfall resulted from reasonable error and you're taking reasonable steps to fix it. To request this waiver, complete lines 50 and 51 showing the shortfall, then enter "RC" and the amount you want waived in parentheses on the dotted line next to line 52, subtract that from the total, and attach a detailed explanation. The IRS will review your request and notify you of their decision. Even while requesting a waiver, you must pay any tax you calculated on line 53 that wasn't waived.

The IRS may also contact you if they identify discrepancies between your Form 5329 and information they received from financial institutions on Forms 1099-R, 5498, or 1099-SA. Keep all supporting documentation—including proof of your exceptions to early distribution taxes, records of contributions to all accounts, and calculations of your required minimum distributions—for at least three years after filing. If you discover errors on your Form 5329 after filing, file an amended form as soon as possible to correct the mistake and minimize potential penalties and interest.

FAQs

I took an early distribution to pay medical bills. Do I automatically avoid the 10% penalty?

Not automatically—you must file Form 5329 to claim the exception. The exemption under Exception 05 only covers unreimbursed medical expenses exceeding 10% of your adjusted gross income (7.5% if you or your spouse are age 65 or older). Calculate your AGI from Form 1040, multiply by 0.10, and subtract that from your unreimbursed medical expenses. Only the excess amount is penalty-free. You'll report the full distribution on line 1 of Form 5329, then enter the exempt portion on line 2 with exception code 05. You'll still owe income tax on the entire distribution, even on the part that avoids the 10% penalty.

What if I contributed too much to my IRA but caught the mistake before filing my tax return?

You're in luck—you can completely avoid the 6% excess contribution tax by withdrawing the excess contributions and their earnings by your tax filing deadline, including extensions. Contact your IRA custodian and request a return of excess contributions. They'll calculate any earnings attributable to the excess and send you both amounts. The withdrawn contribution isn't taxable, but the earnings are, and if you're under 59½, those earnings are subject to the 10% early distribution penalty. Report the earnings on Form 5329, line 1, and you won't need to complete Part III at all since the excess contribution was removed timely.

My employer's 401(k) plan gave me a hardship distribution. Do I owe the 10% penalty?

Yes, in most cases. "Hardship distribution" is a plan term indicating your employer allowed an early withdrawal due to financial need, but it's not automatically an exception under IRS rules. You must determine if your specific situation matches one of the twelve exceptions listed in the Form 5329 instructions. For example, if your hardship involved unreimbursed medical expenses, you might qualify for Exception 05, but only to the extent your expenses exceeded 10% of your AGI. If your hardship doesn't match an exception, you'll owe the 10% additional tax on top of regular income tax. File Form 5329 to report the tax, or if exception code 1 is in box 7 of your Form 1099-R and no exception applies, report the tax directly on Form 1040, line 58.

I forgot to take my required minimum distribution last year. What should I do?

Act immediately to minimize the penalty. First, take the missed distribution as soon as possible, including any amount you should have taken this year. Second, file Form 5329 for the year you missed the distribution, calculating the 50% penalty on line 53. Third, attach a statement requesting a penalty waiver, explaining that the shortfall was due to reasonable error and describing the corrective steps you've taken. Write "RC" and the amount you want waived on the dotted line next to line 52. The IRS frequently grants these waivers if you caught and corrected the mistake promptly, especially if it was your first time taking required distributions. Pay any tax you calculated that wasn't waived, and keep documentation of the corrective distribution.

Can I use my spouse's unused contribution limit to contribute more to my own IRA?

Not exactly, but married couples filing jointly have special rules. If your compensation is less than your IRA contribution limit but your spouse has higher compensation, you can each contribute up to $5,500 (or $6,500 if age 50 or older) as long as your combined compensation is at least $11,000 ($12,000 or $13,000 if one or both spouses are 50 or older). This is called a spousal IRA contribution. Each spouse has their own IRA, but the working spouse's compensation supports contributions to both accounts. You cannot exceed $5,500 in your own IRA regardless of your spouse's situation—the spousal IRA rule simply allows a non-working or low-earning spouse to contribute up to their own limit. Review "How Much Can Be Contributed?" in IRS Publication 590 for the detailed calculations.

My Form 1099-R shows a distribution, but I rolled it over to another IRA. Do I still need Form 5329?

Generally no, because rollovers aren't taxable distributions and don't trigger the early distribution penalty. Report the rollover correctly on Form 1040, lines 15a and 15b or lines 16a and 16b, by entering the total distribution on line 15a (or 16a) but leaving line 15b (or 16b) blank or entering zero if the entire amount was rolled over. As long as you completed the rollover within 60 days of receiving the distribution and followed all rollover rules, the distribution isn't included in your income and isn't subject to the 10% penalty. However, if you kept part of the distribution and only rolled over a portion, the part you kept is taxable and may trigger the penalty, requiring Form 5329.

I'm 62 and retired. Can I take money from my 401(k) without penalty?

It depends on when you retired and which type of account holds the money. For employer-sponsored plans like 401(k)s, Exception 01 allows penalty-free distributions after you separate from service in or after the year you reach age 55 (age 50 for qualified public safety employees). Since you're 62 and retired, you qualify for this exception and can take distributions from your 401(k) without the 10% penalty, though you'll still owe regular income tax. However, this exception doesn't apply to IRAs. If you roll your 401(k) into an IRA, you'd need to wait until age 59½ to avoid the penalty on distributions from the IRA, unless you qualify for a different exception. Consider this carefully before rolling over—keeping money in your employer plan may provide earlier penalty-free access if you retired between ages 55 and 59½.

Sources

Source: IRS Form 5329 (2013) and Instructions for Form 5329 (2013)

‍