What Is IRS Form 5329?
The Internal Revenue Service imposes a 10 percent penalty on early distributions from a qualified retirement plan. Early distribution, according to the IRS, is defined as a withdrawal of funds from a qualified retirement plan before the age of 59½, unless certain specific exceptions are met. IRS tax form 5329 is the form used to report additional taxes on early distributions and must be submitted along with other tax liabilities on the due date, typically April 15.
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Other Uses for Form 5329
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Use IRS form 5329 to report additional taxes from early disributions. The IRS further requires that an individual must file form 5329 when the individual makes a contribution to a qualified retirement plan that exceeds the maximum allowable limit during the prior year. An individual who failed to receive the minimum required distribution from a qualified retirement plan during the prior year must also file form 5329. This is known as the "excess accumulation penalty."
Individuals must also file form 5329 when receiving an early distribution and distribution code "1" is not shown in box 7 of form 109-R. This also applies to individuals who meet the exception to tax on early distribution and code "1" is shown in box 7 of form 1099-R or if box 7 of form 1099-R does not indicate an exception, or the exception does not apply to the entire distribution.
Individuals who receive early distributions from modified endowment contracts, Coverdale ESAs, qualified tuition programs (QTPs), Archer MSAs and HSAs must also use form 5329 to report additional taxes.
Qualified Plans Defined
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The IRS defines a qualified plan as one of the following: a qualified pension, profit-sharing or stock bonus plan (including 401 (k); a tax-sheltered annuity contract; qualified annuity plans and IRAs. Deferred compensation plans are treated as qualified retirement plans to the extent that distributions are attributable to an amount transferred from a qualified retirement plan.
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Rollovers
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The IRS treats rollovers as tax-free distributions when the assets from one qualified plan are transferred to another qualified plan. The transfer must "generally" be completed within 60 days of receiving the distribution. Any amount from the distribution that is not included in the rollover, must be included as income and may be subject to the additional tax on early distributions.
Exceptions to Filing Form 5329
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Exceptions to the tax on early distributions are rather lengthy and can be found on page 3 of the IRS bulletin "Instructions for Form 5329."
In addition to the listed exceptions, it's important to note that it is not necessary to use form 5329 if distribution code "1" is correctly shown in box 7 of all 1099-R forms and the individual owes the tax amount shown on each of the 1099-R forms. The IRS provides instructions on how to report the additional tax on line 58 of form 1040 or line 54 of form 1040NR.
Seeking Tax Advice
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If you believe you need to use IRS form 5329 it may be wise to seek competent tax advice. The consequences of improperly reporting early distributions from qualified retirement plans can be as exceedingly costly, as IRS language on early retirement distributions can be confusing. To avoid the penalty for improper reporting, it is strongly recommended that the taxpayer consult with a competent tax adviser if there are any uncertainties regarding the reporting of early retirement distributions.
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References
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