What Is 2020 Form 5329 and How Do I File It?

Form 5329, “Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts,” is used to report and pay penalties related to retirement and other tax-advantaged accounts. The form calculates any additional tax owed for situations like taking an early distribution, contributing too much to an account, or failing to take a required withdrawal. This tax is separate from any regular income tax that might apply to a distribution.

Triggers for Filing Form 5329

One reason for filing Form 5329 is to pay the 10% additional tax on early distributions from a qualified retirement plan, such as a 401(k) or traditional IRA, before reaching age 59½. This penalty applies to the taxable portion of the withdrawal. You must use this form to calculate and report the tax unless a specific exception applies.

Another trigger is making excess contributions to tax-favored accounts. This happens if you contribute more than the annual limit to accounts like traditional IRAs, Roth IRAs, Health Savings Accounts (HSAs), or Coverdell Education Savings Accounts. The excess amount is subject to a 6% excise tax for each year it remains in the account until corrected.

The form also addresses the penalty for failing to take a Required Minimum Distribution (RMD). The age to begin taking RMDs is 73 for individuals who turn 72 after December 31, 2022. The penalty for failing to take an RMD is 25% of the amount that should have been withdrawn, but it can be reduced to 10% if the shortfall is corrected in a timely manner.

Information and Calculations for Form 5329

To complete Form 5329, you will need several documents. These include any Forms 1099-R, which report withdrawals you made, and Form 5498, which details your IRA contributions. You will also need your own records to verify contribution dates and amounts.

Part I of the form calculates the additional tax on early distributions. In this section, you report the total amount of early distributions included in your income and then subtract any amounts that qualify for an exception to the 10% penalty. Common exceptions include distributions for a total and permanent disability, certain medical expenses, or a first-time home purchase up to $10,000.

Each exception has a corresponding code from the form’s instructions that must be entered on the appropriate line. The remaining amount is then multiplied by 10% to determine the additional tax.

Parts III through VIII address the 6% tax on excess contributions. For a traditional IRA (Part III) or Roth IRA (Part IV), you will need your contribution limit for the year and the amount you actually contributed. If you over-contributed, you also need information from your prior year’s Form 5329 for any existing excess amounts carrying over. The form guides you in calculating the total excess, which is subject to the 6% tax.

Part IX is used to calculate the penalty for failing to take an RMD. This section determines the tax on the amount that should have been withdrawn but was not.

Requesting a Penalty Waiver

You can request that the IRS waive a penalty on Form 5329 if you demonstrate “reasonable cause” for the error. This request is most common for the penalty on a missed RMD. Reasonable cause means you were unable to meet your tax obligation despite exercising ordinary business care and prudence.

To request a waiver for a missed RMD, first calculate the penalty in Part IX. On the line for the total tax, enter “RC” and the amount of the penalty you are asking to have waived in parentheses. You then subtract this waived amount from the calculated penalty, which may result in a zero tax liability for that part.

You must also attach a letter of explanation to your tax return. This letter must state that you are requesting a waiver due to reasonable cause and describe the circumstances that led to the failure, such as an illness or an error by the financial institution. You must also explain the steps taken to remedy the situation, like withdrawing the required amount after discovering the error.

Filing Instructions for Form 5329

If you are required to file a federal income tax return, such as Form 1040, you must attach Form 5329 to it. The total additional tax from Form 5329 is carried over and reported on Schedule 2 (Form 1040), “Additional Taxes.” This amount is then added to your other taxes to determine your total tax liability.

You may need to file Form 5329 by itself if you owe a penalty but are not otherwise required to file a federal income tax return. In this case, complete the name and address section, sign and date the form, and mail it to the appropriate IRS service center. The filing deadline for a standalone Form 5329 is the same as the deadline for Form 1040.

If the form results in an additional tax, you must pay this amount by the tax filing deadline to avoid interest and penalties. Payment should be submitted with your Form 1040 or as instructed by the IRS if filing Form 5329 by itself.