Desktop: Form 5329 - Tax on Early Distribution – Support

Overview

To discourage the use of pension funds for purposes other than normal retirement, a 10% additional tax is imposed on certain early distributions of retirement plan funds. An early distribution is a distribution a taxpayer receives from a qualified retirement plan or deferred annuity contract before reaching age 59-1/2.

The term "qualified retirement plan" means:

A qualified pension, profit-sharing, or stock bonus plan (including a 401(k) plan);
A tax-sheltered annuity contract (403(b) plan);
A qualified annuity plan; and
An IRA.

Distributions that are not taxable, such as distributions rolled over to another qualified retirement plan or a distribution of designated Roth IRA contributions, are not subject to the 10% additional tax.

The 10% additional tax is reported on the appropriate line of Schedule 2 (Form 1040).

When Form 5329 is needed

Form 5329 must be filed if any of the following apply:

The taxpayer received a distribution from a Roth IRA and either the amount on line 25c of Form 8606, Nondeductible IRAs, is more than zero, or the distribution includes a recapture amount subject to the 10% additional tax, or it’s a qualified first-time homebuyer distribution
The taxpayer received a distribution subject to the tax on early distributions from a qualified retirement plan (other than a Roth IRA). However, if distribution code 1 is correctly shown in box 7 of all Forms 1099-R and they owe the additional tax on the full amount shown on each Form 1099-R, Form 5329 doesn't have to be filed and the 10% additional tax can be reported directly in Schedule 2.
The taxpayer received a distribution subject to the tax on early distributions from a qualified retirement plan (other than a Roth IRA) and they meet an exception to the tax on early distributions, but Form 1099-R box 7 doesn’t indicate an exception or the exception doesn’t apply to the entire distribution.
The taxpayer received a taxable distribution from a Coverdell ESA, QTP, or ABLE account.
The taxpayer's contributions for the year to traditional IRAs, Roth IRAs, Coverdell ESAs, Archer MSAs, HSAs, or ABLE accounts exceed their maximum contribution limit, or they had a tax due from an excess contribution on their prior year Form 5329 on line 17, 25, 33, 41, or 49.
The taxpayer didn’t receive the minimum required distribution from their qualified retirement plan. This may be waivable for reasonable cause.

Exceptions to the tax

There are several exceptions to the additional tax on early distributions:

1. Separation from Service after Age 55
Non-IRA qualified retirement plan distributions received after separation from service when the separation from service occurs in or after the year the taxpayer reached age 55 (age 50 for qualified public safety employees and private sector firefighters) or 25 years of service under the plan, whichever is earlier.

2. Part of a Series of Equal Payments
Distributions made as part of a series of substantially equal periodic payments (made at least annually) for the taxpayer's life (or life expectancy) or the joint lives (or joint life expectancies) of the taxpayer and their designated beneficiary (if from an employer plan, payments must begin after separation from service). Distributions received as periodic payments on or after December 29, 2022, will not fail to be treated as substantially equal merely because they are received as an annuity. And, these distributions received as periodic payments will be deemed to be substantially equal if they are payable over a period that satisfies the section 401(a)(9) requirements relating to annuity payments. See Publication 590-B for more information.

3. Due to Total and Permanent Disability
Distributions due to total and permanent disability. (The taxpayer needs to be able to provide proof that they can’t do any substantial gainful activity because of their physical or mental condition. The proof is a medical determination that their condition can be expected to result in death or to be of long, continued, and indefinite duration.)

4. Due to Death
Distributions due to death (doesn’t apply to modified endowment contracts).

5. To the Extent You have Medical Expenses
Qualified retirement plan distributions up to the amount paid for unreimbursed medical expenses during the year minus 7.5% of AGI for the year.

6. Made to an Alternate Payee
Non-IRA qualified retirement plan distributions made to an alternate payee under a qualified domestic relations order (QDRO).

7. IRA Distributions Made to Unemployed Individuals to Pay Health Insurance
IRA distributions made to certain unemployed individuals for health insurance premiums. See Publication 590-B for more information.

8. IRA Distributions Made for Higher Education Expenses
IRA distributions made for qualified higher education expenses.

9. IRA Distributions Made for First Home Purchases, Up to $10,000
IRA distributions made for the purchase of a first home, up to $10,000.

10. Qualified Distributions Due to an IRS Levy
Qualified retirement plan distributions made due to an IRS levy.

11. Reservists while serving on Active Duty for at least 180 days
Qualified distributions to a reservist while serving on active duty for at least 180 days.

12. Incorrectly Indicated as Early Distributions on Form 1099-R
Distributions incorrectly indicated as early distributions by code 1, J, or S in box 7 of Form 1099-R.

13. From a Section 457 Plan, Which aren't from a Rollover
Distributions from a section 457 plan that aren’t from a rollover from a qualified retirement plan.

14. Separated from Employer Maintained Plan by 03/01/1986 and Paid Under Written Election
Distributions from a plan maintained by an employer if:
1. The taxpayer was separated from service by March 1, 1986;
2. As of March 1, 1986, the taxpayer's entire interest was in pay status under a written election that provides a specific schedule for the distribution of their entire interest; and
3. The distribution is actually being made under the written election.

15. Dividends Paid with Respect to Stock Described in Section 404(k)
Distributions that are dividends paid with respect to stock described in section 404(k).

16. Annuity Contracts to the Extent that the Distributions are Allocable to the Investment
Distributions from annuity contracts to the extent that the distributions are allocable to the investment in the contract before August 14, 1982.

17. Phased Retirement Annuity Payments Made to Federal Employees
Distributions that are phased retirement annuity payments made to federal employees. See Publication 721 for more information on the phased retirement program.

18. Permissible Withdrawals Under Section 414(w)
Permissible withdrawals under section 414(w) from eligible automatic contribution arrangements.

19. Qualified Births or Adoption Distributions
Qualified birth or adoption distributions. Attach a statement that provides the name, age, and TIN of the child or eligible adoptee.

20. Distributions Due to Terminal Illness Made After 12/29/2022
Distributions due to terminal illness. Any distributions must be made on or after the date on which the taxpayer's physician has certified that they have a terminal illness or physical condition that can reasonably be expected to result in death in 84 months or less after the date of the certification. See Notice 2024-02 for more information.

21. Corrective Distributions Made After 12/28/2022
Corrective distributions of the income on excess contributions distributed before the due date of the tax return (including extensions).

22. Qualified Distributions to Victims of Domestic Abuse (2024 and fwd)
Qualified distributions to victims of domestic abuse. Any distribution must be made from an applicable eligible retirement plan and made to an individual during the 1-year period beginning on any date on which the individual is a victim of domestic abuse by a spouse or a domestic partner. See Notice 2024-55 for more information.

23. Distributions for Eligible Emergency Expense Distributions (2024 and fwd)
Distributions for eligible emergency expense distributions. A distribution from an applicable eligible retirement plan for the purposes of meeting the unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. See Notice 2024-55 for more information.

24. More than One Exception Applies
Choose this exception number if more than one exception applies. Add a preparer note to the return with more explanation. (Actual exception code is 99.)

25. Does Not Qualify for an Exclusion
Select this to exit this menu, applying no exclusion.

Carrying Form 1099-R distribution to Form 5329

If you enter Form 1099-R with a Box 7 distribution code of 1, 2, J, or S, you'll be asked what amount to transfer to Form 5329, and you'll generally select option 1 to carry the taxable amount in box 2a.

You will then be asked a question:

Does the Amount being Carried to Form 5329
Qualify for Any Penalty Exclusion?

If the taxpayer is claiming an exclusion from the 10% additional tax, select Yes, then select the appropriate exclusion code, then enter the amount that qualifies for an exclusion.