Form 5329-S: How to Address Errors and Avoid Penalties

Form 5329-S is a critical document for individuals handling additional taxes on retirement plans and other tax-favored accounts. Properly addressing errors on this form can help taxpayers avoid costly penalties. Early withdrawals, excess contributions, and missed required distributions are areas where mistakes commonly occur, making attention to detail essential.

Accurately completing Form 5329-S ensures compliance and allows taxpayers to claim penalty exceptions when applicable. Proactive error management can help avoid unnecessary financial setbacks.

Reporting Early Withdrawal Penalties

The IRS imposes a 10% tax on early withdrawals from qualified retirement plans, such as 401(k)s and IRAs, for account holders under 59½. This penalty is in addition to regular income tax and must be reported on Form 5329-S. Taxpayers can also disclose any exceptions that might reduce or eliminate the penalty, such as disability, medical expenses exceeding 7.5% of adjusted gross income, or a first-time home purchase.

For example, withdrawing $10,000 early from an IRA would result in a $1,000 penalty unless an exception applies. Taxpayers claiming exceptions, such as for unreimbursed medical expenses, must provide detailed documentation to substantiate their claims. Maintaining and submitting this documentation alongside tax returns is vital to ensure compliance and avoid disputes.

Excess Contributions to Retirement Accounts

Excess contributions to retirement accounts occur when contributions exceed the allowable limits, triggering a 6% excise tax on the excess amount. For 2024, the contribution limits are $23,000 for 401(k) plans ($30,500 for those 50 and older, including catch-up contributions) and $7,000 for IRAs (with an additional $1,000 for individuals 50 and older). Any excess contributions, along with earnings, must be withdrawn by the tax filing deadline, including extensions, to avoid the annual penalty.

For instance, contributing $1,500 over the limit to an IRA and failing to correct it by the deadline results in a $90 penalty each year until resolved. Taxpayers managing multiple retirement accounts should monitor contributions carefully to prevent breaches. Using tax software or consulting a financial advisor can help track contributions and ensure compliance with limits, including those affected by income levels for Roth IRAs.

Penalty Exceptions

The IRS offers exceptions to penalties for early withdrawals and other infractions under specific conditions. For example, substantial medical expenses—those exceeding 10% of adjusted gross income in 2024—may qualify for a waiver. Similarly, using retirement funds for qualified higher education costs or withdrawing up to $10,000 for a first-time home purchase may exempt taxpayers from penalties.

Each exception requires strict adherence to IRS criteria and thorough documentation. For example, qualified higher education expenses must meet IRS guidelines, and first-time homebuyer withdrawals are limited to individuals who haven’t owned a home in the prior two years. Taxpayers should plan carefully and maintain records to ensure compliance and avoid penalties.

Missed Required Distributions

Failing to take required minimum distributions (RMDs) from traditional IRAs, 401(k)s, and other tax-deferred accounts by the deadline can result in a 25% excise tax on the amount not withdrawn. RMDs must begin by April 1 of the year following the year an individual turns 73.

Taxpayers who miss RMDs due to reasonable error can file Form 5329-S to request a penalty waiver, providing explanations and supporting documentation. Demonstrating genuine efforts to comply with RMD rules is essential to obtaining relief. Addressing missed RMDs promptly can help taxpayers avoid further complications.

Correcting Calculation Errors

Errors in calculating taxes or penalties on Form 5329-S can lead to underpayment penalties or delays in return processing. Mistakes often stem from incorrect arithmetic or misinterpreting IRS instructions. Taxpayers should review calculations carefully and consult the relevant tax codes, such as those governing early withdrawal penalties.

If an error is discovered after filing, taxpayers must submit an amended return using Form 1040-X, including a corrected Form 5329-S. For example, if a $500 penalty was mistakenly reported as $1,000, the amended return should reflect the correct amount. Tax software can reduce errors by automating calculations, but taxpayers should verify inputs, particularly for figures like adjusted gross income and qualified expenses. Consulting a tax professional or consolidating records can further minimize mistakes and ensure compliance.