Keep retirement money for retirement or pay the tax: IRS Form 5329

How to Fill Out IRS Form 5329 and Avoid Penalties

IRS Form 5329 is a tax form that you may need to file if you have certain types of withdrawals or distributions from your retirement accounts, such as IRAs, 401(k)s, or 403(b)s. This form is used to report additional taxes on these withdrawals, such as the 10% early withdrawal penalty, the 6% excess contribution penalty, or the 50% required minimum distribution penalty. In some cases, you may also use this form to claim an exception or waiver for these penalties, depending on your situation.

In this article, we will explain what IRS Form 5329 is, when you need to file it, how to fill it out, and how to avoid common mistakes that could result in penalties. We will also provide some examples of scenarios where you may need to file this form and how to calculate the additional taxes or claim the exceptions. Finally, we will give you some tips on how to plan ahead and avoid unnecessary taxes and penalties on your retirement savings.

Here is a table of contents with links to help you navigate this article:

What is IRS Form 5329?

IRS Form 5329 is a two-page form that has six parts. Each part corresponds to a different type of retirement account or withdrawal that may be subject to additional taxes or penalties. The parts are:

• Part I: Additional Tax on Early Distributions
• Part II: Additional Tax on Certain Distributions from Education Accounts
• Part III: Additional Tax on Health Savings Account Distributions
• Part IV: Additional Tax on Distributions from ABLE Accounts
• Part V: Additional Tax on Excess Contributions to Traditional IRAs
• Part VI: Additional Tax on Excess Contributions to Other Qualified Retirement Plans

You only need to fill out the parts that apply to your situation. For example, if you only have a traditional IRA and you took an early withdrawal from it, you only need to fill out Part I and Part V. If you have multiple types of retirement accounts or withdrawals, you may need to fill out more than one part.

When do you need to file IRS Form 5329?

You need to file IRS Form 5329 if any of the following situations apply to you:

• You took an early withdrawal from your retirement account before reaching age 59½ and you did not qualify for an exception.
• You took a withdrawal from your education account, such as a Coverdell ESA or a 529 plan, and you did not use it for qualified education expenses.
• You took a withdrawal from your health savings account (HSA) and you did not use it for qualified medical expenses.
• You took a withdrawal from your ABLE account and you did not use it for qualified disability expenses.
• You contributed more than the annual limit to your traditional IRA and you did not withdraw the excess amount by the due date of your tax return.
• You contributed more than the annual limit to your other qualified retirement plan, such as a 401(k), a 403(b), or a SIMPLE IRA, and you did not withdraw the excess amount by the due date of your tax return.
• You did not take the required minimum distribution (RMD) from your retirement account by the deadline.

How do you fill out IRS Form 5329?

To fill out IRS Form 5329, you need to follow these steps:

1. Gather the information you need, such as your retirement account statements, your Form 1099-Rs, your Form 5498s, and any documentation that supports your exceptions or waivers.
2. Determine which parts of the form apply to your situation and fill out the corresponding lines. For each part, you need to enter the amount of your withdrawal or distribution, the amount of additional tax or penalty you owe, and the amount of any exception or waiver you claim. You also need to enter the code that identifies the reason for your exception or waiver, if applicable. You can find the codes and instructions for each part in the IRS Form 5329 Instructions.
3. Add up the amounts from each part and enter the total on line 60 of the form. This is the amount of additional tax or penalty you owe for your retirement account withdrawals or distributions.
4. Transfer the amount from line 60 of Form 5329 to line 17 of Schedule 2 of Form 1040 or Form 1040-SR. This is the amount of tax you owe for your retirement account withdrawals or distributions.
5. Attach Form 5329 to your Form 1040 or Form 1040-SR and file them by the due date of your tax return.

Examples of IRS Form 5329 scenarios

Here are some examples of scenarios where you may need to file IRS Form 5329 and how to fill it out:

Example 1: Early withdrawal from a traditional IRA

Suppose you are 45 years old and you have a traditional IRA with a balance of $50,000. In 2023, you took out $10,000 from your IRA to pay for some unexpected expenses. You did not qualify for any exception to the 10% early withdrawal penalty. You also did not make any contributions to your IRA in 2023.

In this case, you need to fill out Part I and Part V of Form 5329 as follows:

The total additional tax or penalty you owe for your IRA withdrawal is $1,000 (line 4 plus line 20). You need to enter this amount on line 60 of Form 5329 and transfer it to line 17 of Schedule 2 of Form 1040 or Form 1040-SR.

Example 2: Withdrawal from a Coverdell ESA

Suppose you have a Coverdell ESA with a balance of $15,000. In 2023, you took out $5,000 from your ESA to pay for your child’s college tuition. The qualified education expenses for your child were $4,000. You did not make any contributions to your ESA in 2023.

In this case, you need to fill out Part II of Form 5329 as follows:

You will need to report this amount on line 59 of your Form 1040 or 1040-SR and attach Form 5329 to your tax return. Don’t forget to keep records of your distributions and expenses in case the IRS asks for them.

Example 3: Contribution to a Coverdell ESA

Suppose you have a Coverdell ESA for your daughter, who is in 10th grade. In 2023, you contributed $2,000 to your ESA. Your modified adjusted gross income (MAGI) for 2023 was $95,000. You are single and file as head of household.

In this case, you need to fill out Part I of Form 5329 as follows:

You do not need to report this amount on your tax return or attach Form 5329, since you did not owe any additional tax. However, you should keep records of your contributions and MAGI in case the IRS asks for them.

Example 4: Contribution to a Health Savings Account (HSA)

Suppose you have a HSA for yourself, and you are covered by a high-deductible health plan (HDHP). In 2023, you contributed $10,000 to your HSA. Your modified adjusted gross income (MAGI) for 2023 was $75,000. You are single and file as head of household.

In this case, you need to fill out Part III of Form 8889 as follows:

You will need to report this amount on line 62 of your Form 1040 or 1040-SR and attach Form 8889 to your tax return. You should also pay this amount by the due date of your return to avoid interest and penalties. You should keep records of your contributions and MAGI in case the IRS asks for them.

Tips to avoid IRS Form 5329 penalties

If you have an IRA, 401(k), or other retirement account, you may be subject to IRS Form 5329 penalties if you don’t follow the rules for withdrawals, contributions, and rollovers. Form 5329 is used to report additional taxes on these accounts, such as the 10% early withdrawal penalty, the 6% excess contribution penalty, and the 50% penalty for not taking required minimum distributions (RMDs). Here are some tips to avoid these penalties and save money on your taxes.

• First, make sure you know your RMD amount and deadline. If you are 72 or older, you must take a minimum amount from your retirement accounts each year, based on your life expectancy and account balance. You can use the IRS worksheets or online calculators to figure out your RMD. You must take your RMD by December 31 of each year, except for the year you turn 72, when you have until April 1 of the following year. If you miss the deadline or take less than the required amount, you may owe a 50% penalty on the shortfall.
• Second, avoid early withdrawals unless you qualify for an exception. Generally, if you take money out of your retirement account before you reach 59 1/2, you will have to pay a 10% penalty on the amount, unless you meet one of the exceptions listed on Form 5329. Some of these exceptions include paying for medical expenses that exceed 10% of your adjusted gross income, buying your first home (up to $10,000), paying for higher education expenses, or becoming disabled. You will also have to pay income tax on the withdrawal, unless it comes from a Roth IRA or a Roth 401(k).
• Third, don’t overcontribute to your retirement account. The IRS sets annual limits on how much you can contribute to your IRA, 401(k), or other retirement plan. For 2021, the limit is $6,000 for IRAs and $19,500 for 401(k)s, plus an extra $1,000 or $6,500 if you are 50 or older. If you contribute more than the limit, you may have to pay a 6% penalty on the excess amount every year until you correct the mistake. You can avoid this penalty by withdrawing the excess amount by the due date of your tax return, including extensions.
• Fourth, be careful with rollovers. A rollover is when you move money from one retirement account to another, such as from a 401(k) to an IRA. If you do a direct rollover, where the money goes directly from one custodian to another, there is no tax or penalty. However, if you do an indirect rollover, where you receive a check and deposit it into another account within 60 days, there are some risks. You will have to report the rollover as income and pay tax on it unless you roll over the entire amount, including any taxes withheld by the payer. You may also have to pay a 10% penalty if you don’t complete the rollover within 60 days, unless you qualify for a waiver due to hardship or error.

By following these tips, you can avoid IRS Form 5329 penalties and keep more of your retirement savings. However, if you do incur any penalties, don’t forget to file Form 5329 with your tax return and pay them by the due date. Otherwise, you may face additional interest and penalties from the IRS.