Form 5329: Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts (2012)

What Form 5329 Is For

Form 5329 is the IRS's way of collecting penalty taxes when you don't follow the rules for tax-advantaged retirement and savings accounts. Think of these accounts—like traditional IRAs, Roth IRAs, 401(k) plans, health savings accounts (HSAs), and education savings accounts—as special deals the government offers you: tax breaks now or later in exchange for following certain guidelines about when and how much you contribute or withdraw.

When you break these rules, Form 5329 calculates the additional tax you owe. The form covers eight different penalty situations, including taking money out too early (before age 59½), contributing too much in a given year, or failing to take required minimum distributions after age 70½. These penalties are separate from your regular income tax and are added on top of any income tax you already owe on the distributions themselves.

The most common use involves the 10% early distribution penalty. If you withdraw money from your IRA or 401(k) before reaching age 59½, you generally pay a 10% penalty on top of regular income tax. However, the form also lets you claim exceptions to this penalty—such as using the money for medical expenses, higher education, or buying your first home—so not everyone who takes an early distribution actually owes the extra tax.

When You'd Use Form 5329

Late and Amended Filing

You typically file Form 5329 attached to your regular tax return (Form 1040) by the same deadline—April 15th for most taxpayers, though extensions apply. However, life doesn't always work on the IRS's schedule, and the 2012 instructions recognize several situations where you might file late or need to amend.

If you didn't file a tax return at all for 2012 but need to report one of these additional taxes, you file Form 5329 by itself at the time and place you would have filed Form 1040. This happens when your income is below the filing threshold but you still took a penalized distribution or made excess contributions.

For amended returns, the rules depend on your situation. If you originally filed your 2012 return without Form 5329 but later discover you owe an additional tax, you must attach the 2012 version of Form 5329 to Form 1040X (Amended U.S. Individual Income Tax Return). You cannot use a newer year's form to fix an old year's problem—you must use the form from the specific tax year you're amending.

There's also a special six-month grace period built into the excess contribution rules. If you timely filed your return without withdrawing excess contributions, you can still withdraw them up to six months after your return's due date (excluding extensions). When you do this, you file an amended return with "Filed pursuant to section 301.9100-2" written at the top, report any earnings from those contributions, and adjust your Form 5329 to show the contributions are no longer being treated as excess.

Key Rules or Details for the 2012 Tax Year

The 10% early distribution penalty applies to most withdrawals from retirement accounts before age 59½, but numerous exceptions exist. You can avoid the penalty for distributions due to death or total disability, certain medical expenses exceeding 7.5% of your adjusted gross income, qualified higher education expenses, up to $10,000 for a first-time home purchase, and distributions made as substantially equal periodic payments over your life expectancy. For employer plans specifically, you avoid the penalty if you separate from service in or after the year you turn 55 (age 50 for public safety employees). Notably, SIMPLE IRA distributions taken within two years of first participating in the plan face a harsher 25% penalty instead of 10%.

Contribution limits must be respected or you face a 6% annual penalty on the excess. For 2012, you could contribute up to $5,000 to IRAs ($6,000 if age 50 or older). This limit applies to the combined total of your traditional and Roth IRA contributions. The penalty applies every year the excess remains in your account, so it's not a one-time charge but an annual tax that continues until you correct the problem. Coverdell education savings accounts have a $2,000 annual limit, though this may be reduced based on the contributor's income.

Required minimum distributions (RMDs) begin the year after you turn 70½ for traditional IRAs. If you don't take out enough money, you face a whopping 50% penalty on the amount you should have withdrawn but didn't. This is the harshest penalty on the form. You calculate the required amount by dividing your account balance on December 31 of the prior year by your life expectancy from IRS tables. The IRS can waive this penalty if you can demonstrate the shortfall resulted from reasonable error and you're taking steps to fix it—you request this by completing the relevant lines, writing "RC" and the waiver amount on the form, and attaching an explanation.

Roth IRAs and designated Roth accounts have special ordering rules for distributions. Money comes out in a specific sequence: regular contributions first (always tax and penalty-free), then conversions (potentially subject to penalty if withdrawn within five years), and finally earnings (taxable and potentially subject to penalty if you're under 59½). For conversions made between 2008 and 2012, there's a "recapture" rule where distributions within the five-year period may be subject to the 10% penalty on the converted amounts that were originally taxable.

Step-by-Step (High Level)

How to Complete Form 5329

Start by gathering all your Forms 1099-R, which report distributions from retirement plans and IRAs. These forms contain crucial information like distribution codes in Box 7 that indicate whether an exception to the early distribution penalty might apply. You'll also need documentation for any contributions you made, including year-end account statements showing balances.

If you took early distributions, complete Part I. Enter the taxable amount of distributions received before age 59½ on line 1. This includes distributions from qualified plans, IRAs, and modified endowment contracts. On line 2, enter any amounts that qualify for an exception to the penalty, along with the exception number from the instructions. Subtract line 2 from line 1 to get your line 3 amount subject to tax, then calculate 10% of line 3 for line 4—that's your additional tax. Remember: if the distribution came from a SIMPLE IRA within the first two years of participation, you multiply by 25% instead.

For excess contributions, work through Parts III through VII depending on which account type you over-contributed to. These sections follow a similar pattern: start with any prior year excess contributions carried forward, then subtract any correcting factors like distributions or increased contribution room from additional compensation, then add current year excess contributions. The penalty is 6% of the smaller of your total excess or the account's year-end value. Since this penalty applies annually until corrected, you must file Form 5329 each year an excess remains in your account.

Part VIII addresses required minimum distributions. Calculate what you should have received on line 50 (your plan administrator should provide this, or you can calculate it using IRS life expectancy tables), enter what you actually received on line 51, and the difference goes on line 52. Line 53 is 50% of line 52—this severe penalty emphasizes how seriously the IRS takes RMD failures. If requesting a waiver, write "RC" and the amount you want waived in parentheses on the dotted line next to line 52.

Finally, attach the completed Form 5329 to your Form 1040, and include the total additional tax from Form 5329 on Form 1040, line 58. If you owe tax, write a check to "United States Treasury" with your Social Security number and "2012 Form 5329" on it.

Common Mistakes and How to Avoid Them

The most frequent error is not filing the form at all when you think you owe the 10% penalty but actually qualify for an exception. Many taxpayers see code 1 in Box 7 of Form 1099-R and assume they must pay the penalty, not realizing they can claim an exception. For example, using IRA money for college tuition qualifies for exception 08, and medical expenses meeting the threshold qualify for exception 05. Always review the complete exception list in the instructions before assuming you owe the tax. If an exception applies to your entire distribution, you must file Form 5329 to claim it unless the correct exception code already appears on your 1099-R.

Another common pitfall involves excess contributions that people try to "fix" by simply withdrawing the extra money. The timing matters crucially: you must withdraw excess contributions (plus any earnings) by your tax return's due date including extensions for them to be treated as never contributed. If you miss this deadline, you can still withdraw them, but you'll owe the 6% penalty for the year the excess contribution was made, and potentially for every year until removed. Many taxpayers also forget that the earnings on withdrawn excess contributions count as early distributions subject to the 10% penalty if they're under 59½.

Misunderstanding the "recapture" rule for Roth conversions creates confusion. If you converted a traditional IRA to a Roth IRA in 2008-2012 and the conversion included taxable amounts, withdrawing those converted amounts within five years of the conversion triggers the 10% penalty, even though you already paid income tax on the conversion. The allocation rules are complex: distributions come first from regular contributions (no penalty), then from converted amounts on a first-in, first-out basis, starting with the taxable portion of each conversion. Many taxpayers incorrectly assume all Roth IRA withdrawals are penalty-free if the account has been open five years, not realizing the five-year clock runs separately for each conversion.

Couples filing jointly sometimes prepare one Form 5329 for both spouses when they should complete separate forms. If both you and your spouse owe additional taxes under Form 5329, you must complete a separate form for each person, then add the totals together to report on Form 1040, line 58. Using one combined form creates processing delays and errors.

Finally, many taxpayers fail to request RMD penalty waivers when they have legitimate grounds. The 50% penalty is harsh, but the IRS frequently waives it for reasonable cause—such as illness, mental incapacity, or receiving incorrect information from a financial institution. To request a waiver, you must complete lines 50-52, write "RC" and the amount to waive in parentheses on the dotted line next to line 52, subtract this from the total shortfall to arrive at line 52, and attach a detailed explanation. Many people pay the full penalty without realizing waiver is possible.

What Happens After You File

Once you file Form 5329 with your tax return, the IRS processes it as part of your overall return. The additional taxes from line 4, 8, 17, 25, 33, 41, 49, or 53 get added to your total tax liability on Form 1040, line 58. If you owe tax, you'll need to pay it by the filing deadline to avoid interest and penalties. The IRS charges interest on unpaid taxes from the original due date of the return, so filing an extension to file doesn't extend your time to pay.

For excess contribution penalties, filing Form 5329 doesn't end your obligation. The 6% tax applies each year the excess remains in your account, so you must continue filing Form 5329 every year until you correct the excess by withdrawing it or by having enough unused contribution room in future years to absorb it. Each subsequent year's Form 5329 carries forward the excess amount, recalculates based on distributions and available contribution room, and assesses another 6% penalty on whatever excess remains.

If you requested a waiver of the RMD penalty by writing "RC" on the form and attaching an explanation, the IRS will review your request separately. This isn't automatic—they evaluate whether your reason constitutes "reasonable error" and whether you're taking appropriate steps to remedy the shortfall. You should take the missed RMD as soon as you discover the error, ideally before filing Form 5329. The IRS typically responds by letter, either approving the waiver, denying it and requesting payment, or asking for additional information. During this review period, you should pay any tax you didn't request to waive, as shown on line 53 after your "RC" reduction.

For early distributions where you claimed an exception, the IRS may request documentation to support your claim. Keep records proving you qualify for the exception you claimed: college tuition bills for education expenses, medical bills and insurance explanation of benefits for medical expenses, settlement statements for first-time homebuyer distributions. The IRS typically has three years from when you file to audit your return, though this can extend to six years in certain circumstances.

If the IRS disagrees with your Form 5329—whether because they don't accept an exception you claimed, they believe you miscalculated an amount, or they think you should have filed when you didn't—they'll send a notice proposing changes and additional tax. You have the right to respond to this notice, provide additional documentation, or appeal the decision. Interest accrues from the original due date of the return, so addressing these issues quickly minimizes additional charges.

FAQs

I took money from my IRA before age 59½ to pay for college tuition. My Form 1099-R shows code 1 in Box 7. Do I automatically owe the 10% penalty?

No. Code 1 simply indicates an early distribution, but the IRS recognizes exceptions. Using IRA funds for qualified higher education expenses (exception 08) avoids the penalty. You must file Form 5329 to claim this exception: enter the distribution amount on line 1, enter the qualified education expense amount on line 2 with exception code 08, and calculate the penalty only on any remaining amount on line 3. Keep receipts showing tuition and related expenses, as the IRS may request documentation. This exception applies to IRAs only, not employer plans like 401(k)s.

I contributed $6,500 to my IRA in 2012, but my income was too high to contribute the full $5,000 limit ($6,000 for me since I'm over 50). What do I do now, and how long will I owe penalties?

You have excess contributions and owe a 6% penalty annually until corrected. The fastest fix: withdraw the $500 excess plus any earnings it generated by the extended due date of your 2012 return (typically October 15, 2013), and the excess will be treated as if never contributed. You'll owe the 10% early distribution penalty on the earnings portion if you're under 59½, but you'll avoid the ongoing 6% penalty. If you miss that deadline, you'll owe 6% of $500 ($30) for 2012, and the excess carries forward to 2013. You'd file Form 5329 for 2013 showing the $500 prior year excess, and if you contribute less than your 2013 limit or take distributions, you may absorb the excess that way. Otherwise, the 6% penalty continues each year.

My father died and I inherited his traditional IRA. I'm 45 years old. If I take a distribution, do I owe the early distribution penalty?

No. Death is one of the fundamental exceptions to the early distribution penalty (exception 04). Beneficiaries who inherit retirement accounts can take distributions at any age without the 10% penalty, regardless of the beneficiary's age or the deceased's age at death. You'll still owe regular income tax on traditional IRA distributions, but not the additional 10% tax. However, you'll have required minimum distributions as a beneficiary—generally based on your life expectancy—and failing to take these RMDs triggers the 50% penalty in Part VIII.

I converted my traditional IRA to a Roth IRA in 2010. Can I withdraw money from my Roth IRA in 2012 without penalty since I'm only 52?

It depends on what you withdraw. Roth IRA distributions follow ordering rules: your regular contributions come out first (always penalty-free), then conversion amounts, then earnings. If you've only made that one conversion and no regular Roth contributions, any distribution will come from the converted amount. Since your 2010 conversion hasn't satisfied the five-year rule yet (that happens in 2015), the taxable portion of what you converted is subject to the 10% early distribution penalty if you withdraw it before age 59½. You'd include this "recapture amount" on Form 5329, Part I. However, if you had made regular Roth contributions in earlier years, those come out first and are completely tax- and penalty-free.

I forgot to take my required minimum distribution from my IRA last year. My accountant says I owe a 50% penalty. Is there any way to reduce this?

Yes, the IRS frequently waives the RMD penalty for reasonable cause. First, take the missed distribution immediately. Then file Form 5329 for the year you missed the RMD, complete lines 50-51 showing what you should have taken versus what you did take (zero), and write "RC" with the amount you're requesting be waived in parentheses on the dotted line next to line 52. Attach a letter explaining why you missed it—such as serious illness, incorrect advice from your financial institution, or mental incapacity—and what steps you've taken to prevent future missed RMDs. The IRS reviews these requests individually and often grants full waivers when the error was unintentional and has been corrected.

Can I use money from my 401(k) to pay the taxes on my 401(k) withdrawal without owing extra penalties?

Not exactly. If you request a $10,000 distribution from your 401(k) and you're under 59½, the entire $10,000 is subject to income tax and the 10% early distribution penalty (unless an exception applies). Many employers will withhold 20% for federal taxes, sending you $8,000 and $2,000 to the IRS. However, the full $10,000 is still taxable income and subject to the penalty. If you want to avoid the penalty on the full amount, you'd need to qualify for an exception. The withholding is just a prepayment of your tax liability; it doesn't eliminate the taxes or penalties owed on the distribution. Some people assume the withholding "covers" the penalty, but it doesn't—it's merely a payment toward your total tax bill.

I'm 58 and was laid off from my job. Can I take money from my 401(k) without the early distribution penalty since I lost my job?

If you separated from service (left your job) in or after the year you reach age 55, yes—exception 01 applies. Since you're 58, you qualify. However, this exception only applies to distributions from the employer plan of the company you just left, not to IRA distributions. If you roll the 401(k) money into an IRA and then take distributions from the IRA, you lose this exception and the 10% penalty applies (unless a different exception applies). Many people unknowingly trigger penalties by rolling their 401(k) into an IRA for consolidation, not realizing they're giving up the age-55 separation exception.

Sources

• 2012 Instructions for Form 5329 - IRS.gov
• Form 5329 (2012) - IRS.gov

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