IRS Form 5329 Instructions: How To File Retirement Plan Tax Form

Beau Henderson

2 months ago

IRS Form 5329 is a very important aspect of any American’s retirement plan. Today’s article explains what Form 5329 is, when to file it, and how to file it.

In this article:

IRS Form 5329 Instructions: When and How to File
Retirement Programs Where Tax Form 5329 Applies
How to Determine If You Need to File
Excess Accumulation Penalty
Assistance for Filing Tax Form 5329
Filing Exceptions and Form 5329 Exception Codes

Form 5329: Everything You Need to Know About How to File Form 5329

IRS Form 5329 Instructions: When and How to File

The Internal Revenue Service (IRS) requires American taxpayers to use Form 5329 to report additional taxes on any qualified retirement plan. It also compels the taxpayer to fill out this form when their distribution income from any qualified retirement plan exceeds the allowable amount.

When taxpayers neglect to fill out and submit this form, they may end up paying more taxes than necessary. Intentionally refusing to file Form 5329 can cost them even more by way of penalties from the Internal Revenue Service.

Retirement Programs Where Tax Form 5329 Applies

As mentioned earlier, Tax Form 5329 applies to any qualified retirement plan. To be more specific, these include:

Employer-sponsored plans such as 401(k)
Employee annuity
A tax-sheltered annuity, like those for employees of tax-exempt organizations and public schools
Deferred contribution plans for state or local government employees

In some cases, the IRS taxes distributions from such retirement plans. However, a taxpayer’s withheld taxes may not be enough even if they’re under a 10% additional tax.

For this reason, taxpayers need to estimate their distributions-related-payments and report them using Form 5329.

How to Determine If You Need to File

Some instances that require taxpayers to file Form 5329 include:

Making an early withdrawal on distributions from their qualified retirement accounts (before turning 59 ½ years old)
Contributing more than the maximum allowable annual contribution for an IRA
Failing to take a required minimum distribution (RMD)

When a taxpayer makes distributions before they turn 59 ½ years old, they need to pay an early withdrawal penalty. The penalty is 10% of the early distribution amount, though there are some exceptions to the rule.

An example of an exempted early distribution is a rollover. The IRS doesn’t penalize a portion, or the entirety of the early distribution a taxpayer rolls over to another qualified retirement program.

For example:

If half of an early distribution of $1,000 is rolled over to a qualified retirement program, the Internal Revenue Service only applies the 10% penalty on the remaining $500 that wasn’t rolled over.
If the entire $1,000 early distribution is rolled over, the taxpayer doesn’t pay any penalties.

When a taxpayer exceeds the annual IRA contribution limits, which is $6,000 for those younger than 50 and $7,000 for those who are 50 years and older, he or she needs to accomplish and file Form 5329, too.

Taxpayers have to withdraw excess contribution for the year from their IRA before the IRA tax-filing deadline. Otherwise, they have to pay an excess tax of 6% per year that the excess contribution stays in their IRA.

Excess Accumulation Penalty

Taxpayers who didn’t take RMDs from their retirement accounts on or before their annual deadlines must also accomplish Form 5329. The IRS requires this under the excess-accumulation penalty rule, which applies to the following retirement accounts:

Traditional IRAs
Savings Incentive Match Plan for Employees (SIMPLE) IRAs
Simplified Employee Pension (SEP) IRAs
403(b)s
Other qualified retirement plans

The excess accumulation penalty is 50%. This applies to the RMD requirement shortfall, which is the amount in distributions the taxpayer didn’t take.

To clarify, let’s say a taxpayer’s annual RMD is $4,000, with the distributions for the year being $3,000. The taxpayer has to pay a 50% penalty of $500 on the remaining $1,000 that should’ve distributed for the year.

Assistance for Filing Tax Form 5329

Not sure how to fill out Form 5329?

For those who feel confused, overwhelmed, and anxious about filing Tax Form 5329 correctly and on time, there’s good news. There are many professionals across the country, such as CPAs and tax preparers, who can do it on their behalf.

Also, the IRS provides free tax assistance services via its IRS-VITA (volunteer income tax assistance) program.

For those who don’t want to be reliant on other people for filing Tax Form 5329 correctly and punctually, here are some important things you need to know for filing it.

Taxpayers must file Form 5329 together with Forms 1040 or 1040-NR on or before the filing due date. The due date, which includes any extensions the IRS may give, is typically on April 15.
Taxpayers can file Form 5329 on their own, particularly when they don’t have to file income tax returns. They must affix their signatures on the first page of the form as well as the date on the second page.
For taxpayers who have to file Form 5329 for a prior year, they must use that prior year’s applicable version of the form. For taxpayers with no changes who didn’t have to file an income tax return for the prior year, they can just use the previous year’s version of the form on its own.
Those who are married filing jointly with their spouses and need to file Form 5329, each spouse must fill up their own form. Afterward, they should combine their taxes on Line 6 of Schedule 2 or Line 57 of Form 1040-NR.

Filing Exceptions and Form 5329 Exception Codes

The IRS exempts several kinds of retirement account distributions from filing Form 5329, which are expressed as codes. These Form 5329 filing exceptions include:

Distributions that are withdrawn by ex-military personnel who left the service in the year they turned 55 or later (Code 01);
Regular distributions (at least annually) that are substantial and equal in amounts, which are related to life expectancies of individuals and their spouses (Code 02);
Total and permanent disability-related distributions (Code 03);
Death-related distributions (Code 04), except for modified endowment contract-related distributions;
Distributions used for IRS-qualified medical expenses (Code 05) less 7.5% of a taxpayer’s AGI or adjusted gross income;
Retirement account distributions to an alternate payee based on the qualified domestic relations order (Code 06), which isn’t applicable to IRAs;
IRA distributions to individuals who got 12 consecutive weeks of unemployment compensation to defray the cost of health insurance premiums (Code 7);
Distributions from IRAs that were used to pay for expenses related to higher education (Code 08);
IRA distributions used to pay for a taxpayer’s very first home up to the amount of $10,000 only (Code 09);
Distributions arising from an IRS levy for an IRA or a qualified retirement plan (Code 10);
Account distributions of taxpayers on the Army reserve list who have served on active duty for at least 180 days (Code 11); and
All other distributions that may qualify for Form 5329 exception.

Correct and timely filing of Form 5329 need not be hard or complicated. Whether you file it yourself or hire a professional to do it for you, keeping the things you read in this article in mind will help you avoid paying unnecessary taxes and penalties to the IRS.

Are you among those who need to file Form 5329 and if so, what’s your key takeaway from this article? Tell us in the comments section below.

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Editor’s Note: This post was originally published on October 2, 2019, and has been updated for quality and relevancy.