Generally, when an individual/taxpayer makes an excess contribution to an individual retirement account (IRA) or takes an early distribution or fails to take a required minimum distribution from an IRA, that individual/taxpayer may be subject to a penalty tax of 10 percent. Furthermore, if a penalty is owed, the taxpayer may be required to file with his/her tax return an IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts to describe, calculate and report the penalty amount. Alternatively, IRS Form 5329 is in some cases filed to claim exemption from a penalty.
However, in a case where a taxable early distribution (i.e., distribution prior to age 59½) was taken from an IRA, an individual may not be required to file an IRS Form 5329 with his/her tax return to claim and pay the 10 percent penalty tax. We will review the appropriate sources of information followed by an explanation of when IRS Form 5329 is and is not necessary to be filed by an individual with his/her tax return.
IRS form 5329, and instructions to IRS forms 5329 and 1040
Immediately above Part I of IRS Form 5329 it states “If you only owe the additional 10% tax on early distributions, you may be able to report this tax directly on Schedule 4 (Form 1040), line 59, or Form 1040NR, line 57, without filing Form 5329. See the instructions for Schedule 4 (Form 1040), line 59, or for Form 1040NR, line 57.”
The IRS Form 5329 Instructions state “… if distribution code 1 is correctly shown in box 7 of all your Forms 1099-R, and you owe the additional tax on each Form 1099-R, you don’t have to file Form 5329. Instead, see the instructions for Schedule 4 (Form 1040), line 59, or Form 1040NR, line 57, for how to report the 10% additional tax directly on that line.”
The instructions for IRS Form Schedule 4, Other Taxes, line 59, “Additional tax on IRAs, other qualified retirement plans, etc.” states the following:
“If any of the following apply, see Form 5329 and its instructions to find out if you owe this tax and if you must file Form 5329. Also see Form 5329 and its instructions for definitions of the terms used here.
- You received an early distribution from (a) an IRA or other qualified retirement plan, (b) an annuity, or (c) a modified endowment contract entered into after June 20, 1988, and the total distribution wasn't rolled over.
- Excess contributions were made to your IRA, Coverdell education savings account (ESA), Archer MSA, health savings account (HSA), or ABLE account.
- You received a taxable distribution from a Coverdell ESA, qualified tuition program, or ABLE account.
- You were born before July 1, 1947, and didn't take the minimum required distribution from your IRA or other qualified retirement plan.
Exception. If only item (1) applies and distribution code 1 is correctly shown in box 7 of all your Forms 1099-R, you don’t have to file Form 5329. Instead, multiply the taxable amount of the distribution by 10% (0.10) and enter the result on line 59. The taxable amount of the distribution is the part of the distribution you reported on Form 1040, line 4b or on Form 4972. Also, enter “No” under the heading Other Taxes to the left of line 59 to indicate that you don’t have to file Form 5329. But you must file Form 5329 if distribution code 1 is incorrectly shown in box 7 of Form 1099-R or you qualify for an exception, such as the exceptions for qualified medical expenses, qualified higher education expenses, qualified first-time homebuyer distributions, or a qualified reservist distribution.”
When an individual who is younger than age 59 ½ has received a taxable distribution and puts together the pertinent information to determine whether he/she must include Form 5329 when filing his/her tax return, there are two possibilities. Form 5329 is not necessary when one or more Forms 1099-R are prepared for an individual and each of the Forms correctly shows distribution code 1, and the individual owes the 10 percent penalty tax on the single or multiple distribution(s) reported. On the other hand, IRS Form 5329 is necessary if an individual takes multiple IRA distributions and multiple Forms 1099-R are issued with different distribution codes shown in Box 7.