Form 5329: Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts (2010)

What Form 5329 Is For

Form 5329 is the IRS form you use to calculate and pay penalty taxes on retirement accounts and other tax-advantaged savings plans. Think of it as the "penalty calculator" for your retirement savings. When you break certain rules about withdrawing money too early, saving too much, or not taking out enough money when required, the IRS imposes extra taxes on top of your regular income tax. This form helps you figure out exactly how much penalty you owe.

The form covers eight different types of penalty situations across various account types, 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 addresses a specific violation of retirement account rules, from pulling money out before age 59½ to contributing more than you're allowed in a given year.

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

You typically file Form 5329 with your regular Form 1040 tax return for 2010, due by April 15, 2011 (or October 15, 2011, if you file for an extension). However, life happens, and you might need to file this form late or make corrections.

If you realize later that you owed a penalty but didn't file Form 5329, you need to file it for that prior year using that specific year's version of the form. If you haven't filed a tax return for that year at all, you can submit Form 5329 by itself to the IRS, making sure to include your address on page one and your signature on page two. If you've already filed your tax return but need to add Form 5329, you'll need to file an amended return using Form 1040X with the appropriate year's Form 5329 attached.

There's also a special situation for excess contributions. If you've already filed your return but then realize you contributed too much to your IRA or other account, you have until six months after your tax return's original due date (not counting extensions) to withdraw those excess contributions and file an amended return. When you do this, write "Filed pursuant to section 301.9100-2" at the top of your amended Form 5329 to let the IRS know you're correcting an excess contribution issue.

Key Rules or Details for 2010

The penalties on Form 5329 fall into several categories, each with specific rules and rates. Understanding these can help you avoid violations or properly claim exceptions.

Early Distribution Penalty (Part I)

If you withdraw money from your IRA or retirement plan before age 59½, you generally owe an additional 10% tax on the amount withdrawn. However, this penalty increases to 25% for SIMPLE IRA distributions taken within your first two years of participation. The good news is there are twelve exceptions, including distributions due to disability, certain medical expenses exceeding 7.5% of your adjusted gross income, first-time home purchases up to $10,000, higher education expenses, and unemployed individuals paying health insurance premiums. If your Form 1099-R shows exception code 1 in box 7 and you qualify for the exception, you may not even need to file Form 5329—you can report the 10% tax directly on your Form 1040.

Education Account Distribution Penalty (Part II)

Taking money from a Coverdell ESA or qualified tuition program (like a 529 plan) for non-educational purposes triggers a 10% penalty on the amount included in your income. Exceptions exist for distributions due to death, disability, scholarships, or military academy attendance.

Excess Contribution Penalties (Parts III–VII)

Contributing more than the allowed amount to traditional IRAs, Roth IRAs, Coverdell ESAs, Archer MSAs, or HSAs results in a 6% annual penalty on the excess amount. For 2010, the IRA contribution limit was $5,000 (or $6,000 if you were age 50 or older). This 6% penalty continues every year the excess remains in your account, making it crucial to remove excess contributions promptly. You can avoid the penalty by withdrawing the excess contributions (and any related earnings) by your tax return's due date, including extensions.

Minimum Distribution Penalty (Part VIII)

Once you reach age 70½, you must start taking required minimum distributions from traditional IRAs and most employer retirement plans (Roth IRAs don't have this requirement during the owner's lifetime). Failing to withdraw the required amount triggers a steep 50% penalty on the shortfall—the difference between what you should have taken and what you actually withdrew. The IRS may waive this penalty if you can demonstrate the shortfall resulted from reasonable error and you're taking steps to remedy it.

Step-by-Step (High Level)

Filing Form 5329 involves working through specific parts based on your situation. You don't need to complete every section—only the ones that apply to you.

Step 1: Determine Which Parts Apply to Your Situation

Review your retirement account activity for 2010. Did you take an early distribution? Contribute too much? Miss a required distribution? Identify which of the eight parts of Form 5329 you need to complete.

Step 2: Gather Your Documentation

Collect all relevant Forms 1099-R showing distributions, contribution records, and any documentation supporting exceptions to penalties. For excess contributions, you'll need records from both the current year and potentially previous years if you had carryover excesses.

Step 3: Complete the Relevant Parts

Start with Part I if you took an early distribution. Enter the total distribution amount on line 1, then on line 2 enter any amounts that qualify for exceptions (listing the exception number from the instructions). The form calculates the 10% additional tax automatically. For excess contributions (Parts III through VII), you'll work through a calculation that considers prior year excesses, current year contributions, distributions, and your contribution limits. For missed required minimum distributions (Part VIII), you'll calculate the shortfall and the 50% penalty.

Step 4: Transfer the Penalty Amounts to Your Form 1040

Each part of Form 5329 that you complete will generate a penalty amount. These all get reported on line 58 of Form 1040 (or line 56 of Form 1040NR). If you're filing Form 5329 by itself (not with a tax return), include payment with your form.

Step 5: Attach Form 5329 to Your Tax Return or File Separately

If you're filing a regular income tax return, attach Form 5329 to it. If you don't need to file an income tax return but owe these penalties, file Form 5329 by itself with your signature, address, and payment.

Common Mistakes and How to Avoid Them

Mistake 1: Not Filing Form 5329 When You Actually Need To

Many taxpayers assume that because they received a Form 1099-R with a distribution code, the IRS automatically knows about their situation. However, if you meet an exception to the early distribution penalty but your Form 1099-R doesn't show the proper exception code, or if the exception only applies to part of your distribution, you must file Form 5329 to claim the exception and reduce your penalty. Don't assume the IRS will figure it out—you need to report it.

Mistake 2: Using the Wrong Year's Form

Each tax year has its own version of Form 5329 with specific rules and contribution limits. If you're filing late or amending a prior year return, you must use that year's version of the form. Using the 2010 form to report 2008 penalties, for example, will cause processing problems because contribution limits and rules differ between years.

Mistake 3: Ignoring Carryover Excess Contributions

If you over-contributed to your IRA in 2009 and didn't fully correct it, that excess carries forward to 2010 and continues generating a 6% annual penalty. Many taxpayers mistakenly believe the penalty only applies once. Always check line 17, 25, 33, 41, or 49 from your prior year's Form 5329—if there's an amount there, you need to account for it on your current year form even if you didn't make new excess contributions.

Mistake 4: Not Properly Correcting Excess Contributions

If you discover you over-contributed, you can withdraw the excess amount plus related earnings by your tax return due date (including extensions) to avoid the 6% penalty. However, many taxpayers forget to withdraw the earnings along with the excess contribution, or they fail to file an amended return showing the correction. The earnings must be included in your income for the year and may be subject to the 10% early distribution penalty if you're under 59½.

Mistake 5: Missing the Special Six-Month Correction Window

Even if you've already filed your tax return, you have up to six months after the original due date (not including extensions) to withdraw excess contributions and file an amended return. Many taxpayers don't know about this extended opportunity. When using this option, write "Filed pursuant to section 301.9100-2" at the top of your amended Form 5329 and include a detailed explanation.

Mistake 6: Failing to Request a Waiver for Missed Required Distributions

The 50% penalty for not taking required minimum distributions is harsh, but the IRS can waive it if you show reasonable cause. Many taxpayers simply pay the penalty without realizing they can request relief. If you missed a required distribution due to reasonable error and you've now taken corrective distributions, attach a statement explaining the circumstances when you file Form 5329. Write "RC" and the amount you want waived next to line 52, and complete the form showing what tax would be due after the waiver.

What Happens After You File

Once you submit Form 5329, several things occur depending on your situation. If you filed the form with your tax return and paid the penalties owed, the IRS will process everything together as part of your overall return. The penalties you calculated on Form 5329 become part of your total tax liability, and the IRS will apply any payments or withholding accordingly.

If you requested a waiver of the 50% penalty for missed required minimum distributions, the IRS will review your explanation and supporting documentation. They'll determine whether your circumstances justify waiving or reducing the penalty. This review process can take several months, and the IRS may contact you for additional information. If they approve your waiver request, they'll adjust your account accordingly. If they deny it, you'll owe the full penalty amount calculated on line 53.

For excess contribution situations, filing Form 5329 starts the clock on correcting the problem. The 6% annual penalty continues year after year until you remove the excess contributions or they're absorbed by years when you contribute less than your limit. Simply paying the 6% penalty for one year doesn't make the problem go away—you need to actually eliminate the excess to stop future penalties. If you withdraw excess contributions within the allowed timeframes and file an amended return, the IRS will process your amendment and adjust your account, typically issuing a refund of any overpaid penalties.

The IRS may also audit your Form 5329, particularly if you claimed exceptions to early distribution penalties or requested penalty waivers. They might request documentation proving you qualified for the exception, such as receipts for qualified higher education expenses, medical bills, or evidence of disability. Keep all supporting documents for at least three years after filing.

If you owe additional tax after filing Form 5329 but don't pay it immediately, the IRS will assess interest and potentially failure-to-pay penalties on the unpaid amount. These are separate from the retirement account penalties calculated on Form 5329 itself. Setting up a payment plan with the IRS is better than ignoring the debt.

FAQs

I took $15,000 from my traditional IRA at age 52 to pay for my daughter's college tuition. Do I have to pay the 10% early withdrawal penalty?

No, if you used the money for qualified higher education expenses. You'll need to file Form 5329 to claim exception number 08 for higher education expenses. On line 1, enter the $15,000 distribution amount. On line 2, enter $15,000 with exception code 08, assuming all of it went toward qualified expenses (tuition, fees, books, supplies, and equipment required for enrollment). This reduces line 3 to zero, so you owe no penalty. Without filing Form 5329 to claim this exception, the IRS would assume you owe the 10% penalty.

I contributed $7,000 to my traditional IRA for 2010, but I just realized my income was too high and I could only contribute $5,000. What should I do?

You have until six months after your tax return's due date (October 15, 2011, if your return was due April 15, 2011) to withdraw the $2,000 excess plus any earnings it generated. Contact your IRA custodian immediately to withdraw the excess contribution and earnings. They'll calculate the earnings attributable to the excess. Include those earnings as income on an amended 2010 tax return. File an amended Form 5329 with "Filed pursuant to section 301.9100-2" written at the top, showing that you've corrected the excess. If you miss this window, you'll owe a 6% penalty on the $2,000 for each year it remains in your account.

My Form 1099-R shows distribution code 1 in box 7, indicating I owe the 10% early distribution penalty. Do I really need to file Form 5329, or can I just pay the penalty directly on my Form 1040?

If the code 1 is correct and you don't qualify for any exceptions, you can report the 10% tax directly on Form 1040, line 58, without filing Form 5329. Simply calculate 10% of the taxable distribution amount and enter it on that line. However, if you believe you qualify for an exception that wasn't indicated on your Form 1099-R, you must file Form 5329 to claim the exception. Many taxpayers discover they qualify for exceptions like the higher education expense exception or the medical expense exception, which their IRA custodian didn't know about when issuing the Form 1099-R.

I turned 70½ in 2009, and I should have started taking required minimum distributions by April 1, 2010, but I forgot. I didn't take any distribution in 2010. What's my penalty?

You'll owe a 50% penalty on the full amount you should have withdrawn but didn't. For example, if your required minimum distribution was $10,000 and you took nothing, you'll owe a $5,000 penalty. However, you should immediately request a waiver by filing Form 5329 for 2010 with a detailed letter explaining why you missed the distribution and what you've done to correct it. Take the required distribution as soon as possible. On Form 5329, enter your required distribution on line 50, enter zero on line 51, and calculate the shortfall on line 52. Write "RC" and the penalty amount you're requesting to be waived next to line 52. Many taxpayers receive waivers if they can show reasonable cause and prompt correction.

I'm married and my spouse and I both need to file Form 5329. Can we combine them on one form?

No, you must complete separate Forms 5329—one for you and one for your spouse. Each form should show the individual's name and Social Security number. After completing both forms separately, add the penalty amounts together and report the combined total on your joint Form 1040, line 58. Attach both Forms 5329 to your tax return.

I contributed to both a traditional IRA and a Roth IRA in 2010. My combined contributions exceeded the $5,000 limit. How does the excess contribution penalty work?

The contribution limit applies to your combined traditional and Roth IRA contributions. If you contributed $3,000 to a traditional IRA and $3,000 to a Roth IRA, you're over the limit by $1,000. You'll need to decide which account to attribute the excess to and complete either Part III (for traditional IRA excess) or Part IV (for Roth IRA excess) accordingly. Most people choose to have excess removed from the Roth IRA because traditional IRA contributions may be deductible. Work with your IRA custodian to remove the excess from the designated account before your tax filing deadline.

What if I filed Form 5329 three years ago but never corrected my excess contributions? Do I owe penalties for the years I didn't file?

Yes, if excess contributions remain in your account, you owe the 6% penalty every year until they're removed or absorbed. You should have filed Form 5329 for each of those years reporting the continuing excess. You'll need to file Forms 5329 for all missed years using each year's appropriate form version. The excess carries forward from year to year, and the IRS can assess penalties for each year you failed to report and pay the 6% tax. File the missing forms as soon as possible to limit additional interest and penalties on the unpaid taxes.

Sources

Source: IRS Form 5329 (2010) and Instructions for Form 5329 (2010)

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