Overview
Generally, when an individual makes an excess contribution to an individual retirement account (IRA), takes an early distribution from an IRA, or fails to take a required minimum distribution from an IRA, that individual may be subject to an additional tax of 6, 10, or 25 percent, respectively. Furthermore, if an additional tax is owed, the individual is generally required to file with his/her tax return Internal Revenue Service (IRS) Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to describe, calculate, and report the additional tax. Alternatively, IRS Form 5329 is in some cases must be filed to claim exemption from the 10 percent additional tax.
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 IRS Form 5329 with his/her tax return to claim and pay the 10 percent additional tax.
Following is a general knowledge article addressing the 2023 tax year that reviews 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, Additional Tax on Early Distributions, of IRS Form 5329, it states, “If you only owe the additional 10% tax on the full amount of the early distributions, you may be able to report this tax directly on Schedule 2 (Form 1040), line 8, without filing Form 5329. See instructions.”
When referring to the 2023 Instructions for Form 5329, in the second item under "Who Must File," it states:
“… if distribution code 1 is correctly shown in box 7 of all your Forms 1099-R and you owe the additional tax on the full amount shown on each Form 1099-R, you don’t have to file Form 5329. Instead, see the instructions for Schedule 2 (Form 1040), line 8, in the Instructions for Form 1040, or the Instructions for Form 1040-NR, for how to report the 10% additional tax directly on that line.”
When referring to the 2023 1040 (and 1040-SR) Instructions for Schedule 2, the Line 8 instructions, Additional Tax on IRAs, Other Qualified Retirement Plans, etc., states:
“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 didn’t take the minimum required distribution from your IRA or other qualified plan by April 1 of the year following the year you reached age 72 (age 73 if you reach age 72 in 2023).
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 8. The taxable amount of the distribution is the part of the distribution you reported on Form 1040, 1040-SR, or 1040-NR, line 4b or 5b, or on Form 4972. Also, check the box on line 8 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.”
Conclusion
When an individual who is younger than age 59½ has received a taxable IRA 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 additional tax on the full amount of 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.
For more information on IRS Form 5329 and its applicability when an IRA owner (or beneficiary) fails to timely take a required minimum distribution see the following article on Wolters Kluwer Insights: IRA required minimum distribution not satisfied: Penalty and penalty waiver request
For an opportunity to learn more about IRAs and other tax-advantaged accounts, including Health Savings Accounts and Coverdell Education Savings Accounts, consider the Wolters Kluwer IRA Library or on-demand video training offered on a variety of topics. Go here to learn more about training opportunities available to you or call us at 1-800-552-9408.
