What is Form 5329: Additional Taxes on Qualified Retirement Plans?
Certain retirement account transactions require you to fill out an additional form with the IRS. Here's when you might need a Form 5329 and how to complete this document.
Key Takeaways
- If you take an early withdrawal from your IRA or 401(k), complete Part 1 or 2 of Form 5329 to calculate possible IRS penalties or request a penalty waiver.
- Use Form 5329 to report withdrawals from a 529 plan or Coverdell education savings account (ESA) not used to pay for qualified educational expenses.
- If you withdraw funds from a health savings account (HSA) but do not use them to cover out-of-pocket medical expenses, use Form 5329 to report this and calculate the penalty.
- If you contribute more than the allowable limit to tax-favored accounts, including IRAs, 401(k)s, HSAs, ESAs, and ABLE accounts, fill out Part 3, 4, 5, 6, 7, or 8 of Form 5329 to calculate the penalty.
Calculating additional taxes
We all know we need to save for the future, but what happens if you contribute more than the annual limit to your retirement or health savings account (HSA)? What happens if you need to take the money out of an IRA before you reach retirement age, or you take money from a 529 plan and don't spend it on qualified education expenses?
Form 5329 is the tax form used to calculate possibly IRS penalties from the situations listed above and possibly request a penalty waiver. Form 5329 applies to each individual that might owe a penalty, so for married couples filing jointly, each spouse must complete their own form.
What is Form 5329?
You may need this form in three situations:
- early distributions from a tax-favored account
- excess contributions to a tax-favored account
- failing to take required minimum distributions
We'll go into each of these three areas in more detail.
Early distributions
In general, you're not supposed to take money out of your IRA or 401(k) before age 59½. If you do, the IRS charges a 10% penalty for the early withdrawal, unless you meet one of the exceptions. Some of the most common exceptions to the 10% penalty are:
- Disability. You become totally and permanently disabled.
- IRS levy. You withdraw funds to satisfy an IRS levy.
- Medical expenses. You used the money to pay for medical expenses that exceed 7.5% of your adjusted gross income.
- Health insurance. You withdrew funds to pay for health insurance while you were unemployed.
- Military. You're a member of the military reserves called to active duty for more than 179 days.
Beginning in 2024, the Secure 2.0 Act added certain instances where money can be taken out of these accounts including:
- Financial emergencies. One withdrawal per year up to $1,000.
- Victims of domestic abuse. Within the past 12 months can withdraw up to the lesser of $10,000 or 50% of their account.
- Federally declared natural disaster areas. Withdraw up to $22,000.
- Terminal illness. Withdraw any amount if diagnosed with an illness reasonably expect to result in death within seven years.
You may also avoid penalties for early withdrawals from IRAs (but not 401(k)s) for the following reasons:
- Higher education expenses. You used the money to pay for tuition, fees, books, and required supplies for you, your spouse, child, or grandchild.
- First-time home purchase. You withdraw up to $10,000 (or $20,000 for a married couple) to help with the purchase of your first home.
Other distributions can also lead to a 10% penalty, including funds taken from a 529 plan or Coverdell educational savings account (ESA) that you don't use to pay for qualified educational expenses. However, you may qualify for an exception if the account beneficiary receives a tax-free scholarship or educational assistance from an employer or attends a U.S. Military Academy.
Withdrawing money from an HSA without using it to cover out-of-pocket medical expenses can also warrant a penalty.
Whether you owe the penalty or qualify for an exception, if you take an early distribution from a qualified account, you need to complete Part 1 or 2 of Form 5329.
TurboTax Tip:
If you missed taking your required minimum distributions (RMDs) from a tax-deferred retirement account due to reasonable cause, use Part 9 of Form 5329 to request a waiver from the penalty.
Excess contributions
Many tax-favored accounts, including IRAs, 401(k)s, HSAs, ESAs, and ABLE accounts, have annual contribution limits.
For 2024, the contribution limits are:
- $7,000 to a Roth IRA or traditional IRA ($8,000 if age 50 or older)
- $22,500 to a 401(k), 403(b), or 457 plan (plus an additional $7,500 in catch-up contributions for people age 50 or older)
- $4,150 to an HSA for individual health insurance coverage, or $8,300 for family coverage ($4,300 and $8,550, respectively, for 2025)
- $2,000 to a Coverdell educational savings account
- $18,000 to an ABLE account
For 2023, those contribution limits are:
- $6,500 to a Roth IRA or traditional IRA ($7,000 if age 50 or older)
- $23,000 to a 401(k), 403(b), or 457 plan (plus an additional $7,500 in catch-up contributions for people age 50 or older)
- $3,850 to an HSA for individual health insurance coverage, or $7,750 for family coverage
- $2,000 to a Coverdell educational savings account
- $17,000 to an ABLE account
If you contribute more than the allowable limit, you have until the tax filing deadline or extension deadline, if you file for a tax extension, to withdraw your excess contributions. If you miss that deadline, the IRS imposes a penalty of 6% of the excess amount for each year that it remains in your account.
You'll fill out Part 3, 4, 5, 6, 7, or 8 of Form 5329 to calculate the penalty. Each type of account has its own section, so you only need to complete the section that pertains to your account — for example, Part 3 for a Traditional IRA or Part 4 for a Roth IRA.
Missed required minimum distribution
Typically, when you reach the age of 72, or age 73 if you reach age 72 after December 31, 2022, you must start taking required minimum distributions, or RMDs, from your Traditional IRA or 401(k). The amount you must withdraw is based on the total value of all of your tax-deferred retirement accounts divided by your life expectancy, which you can calculate according to an IRS worksheet. With traditional IRAs, you can add up the balances in all your traditional IRAs, divide the total by the life expectancy factor, and take the money from one or more accounts. However, with 401(k)s and 403(b)s, you must calculate and withdraw the required amount separately from each account.
However, your financial institution or IRA custodian will usually calculate your RMD for you.
The deadline for taking your required minimum distribution is usually December 31 of each year. If you don't withdraw the minimum amount from your plan, the penalty is severe: For years prior to 2023, the IRS charges you 50% of the amount you don't take on time. Beginning in 2023, this amount is reduced to 25% of the amount you don't take on time. You may be able to get the penalty waived if you missed taking your RMD due to an illness, mental incapacity, or bank error.
You'll calculate that penalty in Part 9 of Form 5329. To request a waiver, enter “RC” (for reasonable cause) and the amount of shortfall you want waived on the dotted line next to Line 54. Attach a letter to your tax return explaining the situation.
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