What is IRS Form 5329?

IRS Form 5329

In the majority of cases, you have to file different forms if you want to receive the right tax treatment for your income. And this includes your income that you have earned as a part of your retirement plan. Any income received from an education savings account is also a part of this. If you do not file the required forms then you will have to pay way more than the amount that you actually owe as taxes. This is when the IRS Form 5329 comes into the picture. This form is for Additional Taxes on Qualified Retirement Plans and Other Tax-Favored Accounts. Now you must be having a lot of questions in mind like what is Tax form 5329 and how to fill this. Here, you will get answers to all such questions.

What is IRS Form 5329?

A taxpayer fills out the IRS Form 5329 when he/she has a retirement plan or ESA and there is a requirement to indicate whether he/she has to pay the ten percent early-distribution or any other penalty to the IRS.

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A Detailed Overview:

If an individual earned an income as a distribution from his/her retirement plan before reaching the age of 59.5 years then he/she will have to pay an early-distribution penalty of ten percent of the distributed amount to the IRS. This can change when there is an exception.

By and large, the issuer (the IRA or ESA caretaker or qualified arrangement chairman) will show on Form 1099-R ( for qualified plans and IRAs) or Form 1099-Q ( for training bank accounts and 529 plans) regardless of whether the circulated sum is different from the early-appropriation penalty. If there is an exemption to the early-dissemination punishment then the guarantor will reference in the crate 7 while rounding out the IRS Form 1099-R.

At times, there can be instances when the issuer does not make complete indication while filling out the form. This can happen when the taxpayer earned an income as distributions from a substantially equal periodic payment program. The IRA runs the SEPP program. However, if the individual has selected Code 1 instead of Code 2 in Box 7 while filling out the IRS Form 1099-R then it clearly means that there is no exception. This way the IRS will start believing that the amount that has been reported on the IRS Form 1099-R is not included in the substantially equal periodic payment program.

As a result, it will appear like the SEPP program has been violated by the taxpayer. And now he is responsible for paying the penalty charges to the IRS along with interest on all the previous distributions that took place as a part of the SEPP program. Although the taxpayer gets a chance to amend this mistake. For this, he/she will have to fill out the IRS Form 5329.

Here is a detailed list of some other circumstances in which a taxpayer will have to fill out the IRS Form 5329:

  • When the taxpayer earns an income as a distribution from the retirement plan. And if this meets an exception to the early distribution penalty, but the taxpayer does not mention this exception on the Form 1099-R. In this case the taxpayer will have to complete the first part of the IRS Form 5329.
  • The second case is when the taxpayer earns an income as a distribution from the retirement plan but it does not meet any exception to the penalty. If the taxpayer indicates on the form by mistake that there is an exception will have to complete the first part of the IRS Form 5329.
  • When the taxpayer earns an income as a distribution from an education savings account. Although in this case the amount was not used for eligible education expenses, and the taxpayer does not meet an exception to the early distribution penalty. In such a scenario the taxpayer will have to complete the first part of the IRS Form 5329.should complete Part 2 of Form 5329.

Early Withdrawals and the CARES Act:

The entry of the CARES (Coronavirus Aid, Relief, and Economic Security) Act in March 2020 takes into consideration early withdrawals from 401(k) and singular retirement accounts (IRA) punishment free. You can consider that the COVID-19 pandemic is affecting these hardship withdrawals. The sum that can be pulled back punishment free is up to $100,000.

Excess-Contribution Penalty:

An individual may contribute the lesser of 100% of qualified pay or $6,000to an IRA for both 2019 and 2020. Or the pay is $7,000 if at any rate age 50 by year-end. For ESAs, the commitment is restricted to $2,000 every year for every recipient (ESA proprietor).

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There can be cases when the IRA overseer or plan trustee fails to take care of the punishment charges. In this way, while presenting a dissemination demand, you should choose to have sums retained distinctly for government and state charge, if pertinent. You have to pay the punishments directly to the IRS, and remember for your assessment form or material tax documents.

These structures must be documented by the person’s expected date for recording their assessment form, including expansions. If the form is being petitioned for a past assessment year. The structure material to that charge year ought to be utilized. Inability to utilize the structure for the material duty year may bring about the punishment for an inappropriate year.

The best possible consummation and recording of every single pertinent structure are a significant piece of the assessment documenting process. People ought to talk with their expense proficient for help with finishing and documenting the fitting structures.

Final Thoughts!

Being a taxpayer paying more than the actual tax amount owed the last thing you would ever want to do. You will also not want to pay any penalties. And you do not want the IRS to know that you have not paid the taxes on time. Because this simply means that you will have to pay some penalty charges for the amount you owe.

It is very important for a taxpayer to understand that when he/she needs to file the IRS form 5329. If you have decided to handle everything related to your taxation on your own. Then it can become a little difficult for you to determine when you need to fill out which form. This is when the need of hiring a tax professional arises. Having a professional tax expert with you will help you to handle everything very efficiently.

Are you wondering how to get started. You can Contact us on Accounts Confidant +1-866-301-2307 If you have further queries.

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