2021 Form 5329: Additional Taxes on Qualified Plans

Form 5329, “Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts,” is the Internal Revenue Service (IRS) document for the 2021 tax year used to report and calculate penalties on these accounts. This form is necessary when certain rules are not followed.

Who Must File Form 5329 for 2021

A taxpayer must file Form 5329 for the 2021 tax year if they engaged in specific transactions with their tax-favored accounts. One of the most common reasons is receiving an early distribution from a qualified retirement plan, such as a 401(k) or traditional IRA, before reaching age 59½. Filing is also necessary if you made excess contributions to accounts like a traditional or Roth IRA, a Health Savings Account (HSA), an Archer Medical Savings Account (MSA), or a Coverdell education savings account (ESA).

Another event that necessitates filing is the failure to take a Required Minimum Distribution (RMD) from a qualified retirement plan, which for 2021 applied to individuals age 72 or older. You must also file if you received a distribution from a Roth IRA that includes a recapture amount or is a qualified first-time homebuyer distribution. Even if you qualify for an exception to a penalty, you may still need to file Form 5329 to claim that exception if it is not properly noted on your Form 1099-R.

Calculating the Additional Taxes by Part

Part I – Early Distributions

Part I of Form 5329 calculates the additional tax on early distributions. If you received a taxable distribution from a retirement plan before age 59½, you are subject to a 10% additional tax on that amount. The tax code provides several exceptions to this rule, which are entered on line 2 of the form.

Common exceptions that can avoid the tax include distributions for:

• Death or total and permanent disability (Exception Code 03 or 04).
• Unreimbursed medical expenses exceeding 7.5% of your adjusted gross income (Exception Code 05).
• Qualified higher education expenses (Exception Code 08).
• A first-time home purchase, up to $10,000 (Exception Code 09).
• A qualified birth or adoption, up to $5,000 (Exception Code 12).

You must enter the correct exception code on line 2 to claim an exemption.

Part IX – Missed Required Minimum Distributions (RMDs)

Failing to take the required minimum distribution (RMD) from a retirement plan by the deadline results in a penalty. For the 2021 tax year, the penalty was 50% of the RMD amount that was not withdrawn in time. For example, if your required distribution was $10,000 and you only took $4,000, the penalty would be 50% of the $6,000 shortfall, resulting in a $3,000 tax. This penalty was reduced for tax years beginning in 2023.

The IRS may waive this penalty if the failure to take the RMD was due to a reasonable error and you are taking steps to remedy the shortfall. To request a waiver, file Form 5329, calculate the penalty, and write “RC” and the amount of the waiver you are requesting on the dotted line next to line 54. A letter of explanation must be attached to the return detailing the reasonable cause for missing the RMD.

Parts III through VIII – Excess Contributions

Parts III through VIII of Form 5329 address the 6% excise tax on excess contributions to various tax-favored accounts. This tax applies for each year the excess amount remains in the account at the end of the year. For 2021, the IRA contribution limit was $6,000, or $7,000 if age 50 or older.

The calculation involves determining the excess contribution for the current year and adding any excess contributions from prior years that have not been corrected. You can avoid the 6% tax for the current year’s excess contribution if you withdraw it, along with any earnings, by the due date of your tax return. The tax is calculated on the smaller of the total excess contributions or the total value of the specific account at the end of the year.

The relevant parts of the form cover:

• Traditional IRAs (Part III)
• Roth IRAs (Part IV)
• Coverdell ESAs (Part V)
• Archer MSAs (Part VI)
• Health Savings Accounts (HSAs) (Part VII)

How to Complete and Submit the Form

The total additional tax is the sum of the amounts from each part of the form. This final figure is then reported on your main income tax return. The total additional tax calculated on Form 5329 is carried over to Schedule 2 (Form 1040), “Additional Taxes.” You will enter the total from Form 5329 on line 8 of Schedule 2.

If both you and your spouse are required to file Form 5329, you must each complete a separate form, but the combined tax from both forms is entered on a single line on your joint Schedule 2. Form 5329 must be attached to your 2021 Form 1040, 1040-SR, or 1040-NR and filed by the standard tax deadline, including any extensions.

In the situation where you are required to file Form 5329 but do not have to file a full income tax return, you can file Form 5329 by itself. When filing it alone, you must sign the form and mail a paper copy to the IRS with your payment.